Macquarie Equities Research (MQ Research) released a research note on AirAsia, following a meeting with the group’s CEO, reiterating their outperform rating and keeping their price target at RM4.00.

Event

• MQ Research reiterates their outperform rating on AirAsia with an unchanged target price of RM4.00 (+34% total shareholder return) following a meeting with Malaysia CEO, Aireen Omar. Key takeaways include: 1) strong demand supporting its reaccelerated growth for the Malaysia entity in 2017, 2) on track for leasing monetisation this year with a guided US$900mn–1.2bn valuation and 3) ramping up initiatives to boost ancillary income given unsatisfactory performance so far.
• With the potential for a special dividend accruing from the leasing portfolio monetisation, AirAsia remains one of MQ Research’s top picks in the Asian airline space. The stock trades at a 7.3x 2018E enterprise value/earnings before, interest, taxes, depreciation, amortisation, and rent (EV/EBITDAR) vs its seven-year average of 8.4x.

Impact

• 7-8 additional fleet for Malaysia, translating to a double-digit capacity expansion in 2017. This is higher than its muted 3.5% compound annual growth compound annual growth rate (CAGR) over the past three years (FY14–16A), which was mired by industry overcapacity, limited bilateral rights on certain routes and a pilot shortage. Rapid expansion should help alleviate some of its domestic routes, which are seeing load factors >90%; build its breadth and depth in China, which would reaffirm its leading market-share position in the China–Malaysia market; and continue building a presence in IndoChina and India.
• Leasing monetisation on track as previous guidance. Final bidding closed late-March 2017. AirAsia has identified a buyer and is in a documentation process that will be subject to board and, subsequently, shareholder approval (potentially in May or June). MQ Research understand from management that the portfolio consists of 74 aircraft, thus valuation will fall short of their US$1.8bn valuation which was based on a 150-aircraft portfolio. Nonetheless, MQ Research still sees its’ US$900mn–1.2bn valuation guidance as feasible. Cash proceeds from the monetisation can be paid out as a special dividend (50% payout = 71–95 sen, or a 23–31% dividend yield) or to reduce current net gearing of 1.3.

• Ramping initiatives to boost ancillary income. Although ancillary income was up 5% in FY16 to RM46, management feels it was unsatisfactory and maintains its RM60 medium-term target. It is expecting an uplift in FY17, mainly from baggage (being strict on the 7kg weight limit) and duty-free sales. F&B menu could see a change to add excitement and reduce waste, while management is reassessing its cargo business through a potential collaboration with a postal operator to ride on e-commerce growth.

Action and Recommendation

• MQ Research reiterates Outperform on AirAsia and has a 12-month target price of RM4.0

Source: Macquarie Research - 19 Apr 2017