We came back from AIRASIA’s briefing feeling positive about its growth prospect which is driven by improving traffic, yields and their determination in streamlining business by disposing non-core assets, and we are expecting the divestment of its leasing company to take place by year-end as guided by management. Maintain OUTPERFORM with an unchanged Target Price of RM3.41 based on 9x FY16E FD PER.

The next phase of growth. We attended an analysts’ briefing held by AIRASIA yesterday. The briefing chaired by Tan Sri Tony Fernandes gave us better insight and updates on AIRASIA’s future direction. In terms of the next growth area, AIRASIA is eyeing for more opportunities in North Asia, ASEAN, and India in which they are aiming to obtain more air operator’s certificates (AOC) due to the density of the population and connectivity. For instance, China is well-connected to other key markets like Japan, Korea, and Taiwan.

A simpler structure. Apart from growth areas, management is determined to streamline its business to focus solely in its bread and butter airline business, which targets passenger traffic growth, and also ancillary business. This means that management is looking to spin off most of its non-core businesses in the near-to-mid-term starting with Asia Aviation Capital (AAC), its aircraft leasing company.

Divestment in leasing co. We are positive with the management's intended move in divesting AAC as it would further lighten AIRASIA’s balance sheet. While the quantum of the divestment is yet to be determined, AIRASIA is still looking to hold a majority stake of 20%- 30% in AAC post divestment. In terms of timeline, they are targeting to complete the divestment to the interested party by year-end.

Ancillary! Apart from passenger traffic growth and divestments of noncore assets, one of the key gist of the briefing is their ambition in growing their ancillary income. Management is looking to grow its ancillary income by another 20% from RM50/pax to RM60/pax. In order to achieve their target of RM60/pax, management has been relentlessly improving its duty-free shopping experience by providing a cheaper alternative to airport duty-free. That said, they are also looking to introduce TPAAY, a FX wallet with 10 currencies changeable via app, and we see great potential in TPAAY for the convenience and flexibility it provides for travellers that are traveling within the ASEAN region.

Outlook. Going forward, we remain positive on AIRASIA’s outlook premised on low jet fuel cost, improving yields, passengers load factors and ancillary income. No changes to our FY16-17E core earnings.

Maintain OUTPERFORM. We are reiterating our OUTPERFORM call on AIRAISA based on an unchanged Target Price of RM3.41 pegged to 9x FY16E FD PERof which we might look to upgrade further after its coming 2Q16 results, which is slated on 29th August 2016. We continue to like the stock for its growth potential, its competitive advantage in the aviation industry for its low operating costs and a potential special dividend from its divestment in AAC.

Source: Kenanga Research - 16 Aug 2016