Yesterday, news cited that the governments of Malaysia and Singapore have signed the Memorandum of Understanding (MoU) for the proposed Kuala Lumpur-Singapore High-Speed Rail (HSR) project. While the news is negative to AirAsia as it should intensify competition, the operation of HSR will only commence in 2026. We maintain our Neutral call on AirAsia, with target price of RM2.36, pegged on 8x FY17F EPS. Our target price is based on enlarged share capital, including the proposed share placement to Tune Live Sdn Bhd.

Details on KL-Singapore High-Speed Rail (HSR). The HSR is expected to shorten the travel time between Kuala Lumpur and Singapore from four to five hours by road to just 90 minutes. The line will consist of eight stations, seven of which will be in Malaysia. The HSR is expected to be operational by 2026.

Our view. Although the operations of the HSR will only takes off in ten years’ time, we believe the news is negative to AirAsia, as it should intensify competition in the current KL-Singapore route, which takes around 1 hour travel time. Nevertheless, this is still subject to the pricing power of the HSR services going forward.

Maintain Neutral. We expect passenger fares in 2H to remain strong compared to last year due to travel demand recovery. Yields are back to 3-year averages, suggesting a healthy improvement to bottom-line. However, we believe the positives have already been priced-in amid the continued run-up in share prices, hence we maintain our Neutral call with target price of RM2.36, pegged on 8x FY17F EPS. Our target price is based on enlarged share capital, including the proposed share placement to Tune Live Sdn Bhd which is expected to complete by 3QFY16.

Source: PublicInvest Research - 20 Jul 2016