Every cloud has a silver lining (Airasia)

by **Cals** Mon 18 Aug 2014, 22:19

Every cloud has a silver lining

Business & Markets 2014

Written by Alliance DBS Research

Monday, 18 August 2014 10:00

AirAsia Bhd
(Aug 15, RM2.37)
Maintain buy with target price of RM3.20: AirAsia’s superior cost advantage (best in class unit cost of 4.4 US cents (13.86 sen) per available seat kilometers (ASK) will help the group to weather cut-throat competition and emerge the victor after the current industry upheavals.

Its recent decision to dispose of 12 older aircraft and convert A320ceos orders to the 12% more fuel-efficient A320neos will entrench its advantage.

Meanwhile, our study suggests Asia-Pacific capacity growth will peak in 2015, which could return pricing power to the airlines thereafter.

Further, we expect Malaysian Airline System Bhd (MAS)’s selective capital repayment, to be completed in the fourth quarter of financial year 2014 ending December (4QFY14), to pave the way for massive restructuring involving capacity rationalisaton. If so, this will remove excess capacity in the industry and lift yields to more sustainable levels. Premised on this, we pencil in 4% yield recovery in FY15F and 2% for FY16F, which coupled with our other adjustments, raise earnings by 27% and 47%. Our revised earnings are 19% and 28% above consensus estimates for the respective years.

Thai Air Asia (TAA) is set to resume its earnings growth trajectory as tourist arrivals are expected to pick up following the resolution of the Thai political crisis. Indonesia Air Asia (IAA) could also see operations turn around in FY15 if the rupiah strengthens following the installation of Joko Widodo as Indonesia’s president. Also, plans are underway to turn around Philippines Air Asia (PAA), while Air Asia Expedia (AAE) is set to deliver strong earnings going forward.

Our sum-of-parts-based target price (TP) of RM3.20 implies an FY14 price earnings ratio of 15 times, FY15 of 10 times and eight times for FY16. AirAsia’s current stock price ignores the prospect for yields to recover in FY15F. — Alliance DBS Research, Aug 15

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This article first appeared in The Edge Financial Daily, on August 18, 2014.[/size]