Fair Value: RM3.63 | Recom : Trading Buy

"Bring it on!". AirAsia struck us as being "eager" rather than "anxious" to see the kind of competition new entrance Malindo Airways (Malindo) can bring to the table. AirAsia was unable to go into specific details with regards to how it will defend its turf against Malindo. This is understandable given that Malindo has yet to roll out its products, and as such, it is still unknown as to where it will deploy its initial capacity as well as its pricing strategy.

Price war may be relatively contained. A price war, if it happens, will be limited to AirAsia’s routes that Malindo can replicate and up to the frequencies it can do (that will be constrained by its capacity). While it is legitimate for the market to price in a potential price war, it may have erred in jumping the gun without going into a more in-depth analysis of the price war in terms of its depth and width (that we believe are likely to turn out to be much more contained vis-à-vis the market expectations).

Relocation to KLIA2 not to be taken for granted. AirAsia reiterated the message that one should not take AirAsia’s impending relocation from LCCT to KLIA2 for granted, but it should be conditional upon the new airport meeting “safety standards” and “operational readiness”.

Next growth phase mapped out. AirAsia has mapped out its next phrase of growth, backed by confirmed orders for 272 aircraft plus an order for 100 additional aircraft currently “under discussion” with Airbus, to be delivered between now and 2026.

Forecasts. Maintained.

Risks to our view. These include: (1) Lower-than-expected yields achieved; (2) Higher jet fuel cost; and (3) Inability to contain outbreaks of pandemic diseases.

Maintain Trading Buy. AirAsia’s near-monopoly in the domestic low-cost air travel market will be broken with the entrance in May 2013 of Malindo. However, we believe AirAsia has many “defences” against it including AirAsia’s true-blue low-cost model (vis-à-vis Malindo’s hybrid or value airline model), stronger balance sheet, bigger size, highly recognised “AirAsia” brand and good safety records. Value has emerged after the recent selldown. Fair value for AirAsia is RM3.63 based on 12x FY12/13 EPS, in line with benchmark Ryanair’s 1-year forward target PER.

Source: RHB Research - 18 Oct 2012