Bursa Malaysia: Airasia- may see greater height

Results Update

For QE31/3/2011, Airasia's net profit dropped by 46% q-o-q or 23% y-o-y to RM172 million while turnover dropped 11.7% q-o-q but rose 20.4% y-o-y to RM1.048 billion. On Page 16-17 of the detailed Financial Statements (plus Notes), you would see that Airasia enjoyed a y-o-y improvement in seat load factors of 6% points (from 74% to 80%); volume growth of 17%; and, ancillary income growth of 31% (from RM38 to RM50 per passenger). This was partially offset by a 5%-decline in average fare From RM173 to RM164.

The main reason for the y-o-y decline in Airasia's net profit was the decline in Finance Income from RM306 million to RM116 million, which consists mainly forex gains that had dropped from RM287 million to RM101 million. On the other hand, Finance Costs had also declined y-o-y from RM215 million to RM155 million.


Financial Position

The main concern for Airasia is its high leverage position. Due to its strong cashflow from operation, the leverage position has declined steadily, albeit still on the high side. Airasia generated cashflow from operation of RM454 million for QE31/3/2011 (compared to RM296 million for QE31/3/2010). Net gearing ratio dropped from 2.25 times as at 31/3/2010 to 1.57 times as at 31/3/2011.

As at 31/3/2011, current ratio stood at 1.65 times- an improvement from 1.35 times as at 31/3/2010.

Valuation

Airasia (closed at RM3.19 yesterday) is now trading at a PE of 8.7 times (based on last 4 quarters' EPS of 36.8 sen). However, it must be noted that the last 4 quarters' total net profit of RM1.014 billion consists of net forex gain of RM370 million. If we exclude this forex gain from the net profit, the EPS would be adjusted lower to 23.4 sen. This would give an adjusted PE of 13.6 times.

Singapore Airlines Ltd [SIA] (SGX Code: C6L), a full-service airline, is currently trading at a PE of 15.4 times. SIA's top-line & bottom-line did not grow over the past 4 years (from FY Mar2008 to Fy Mar2011). Turnover dropped from S$15.97 billion to S$14.52 billion while Net Profit plummeted tfrom S$2.05 billion to S$1.09 billion. For more, go here. SIA has just announced that it would be started a low-cost airline next year to capture the market for budget flyers.

When we compare the two airlines, Airasia looks the more promising model while SIA is well-known to be financially strong. Since Airasia is trading at a lower PE multiple than SIA, I would consider its upside potential to be better. If it can command the same PE multiple as SIA, Airasia's fair value could be RM3.60.

Technical Outlook

Airasia is in an uptrend line, with support at RM2.85. Its immediate support is the horizontal line at RM3.05


Financial Position

The main concern for Airasia is its high leverage position. Due to its strong cashflow from operation, the leverage position has declined steadily, albeit still on the high side. Airasia generated cashflow from operation of RM454 million for QE31/3/2011 (compared to RM296 million for QE31/3/2010). Net gearing ratio dropped from 2.25 times as at 31/3/2010 to 1.57 times as at 31/3/2011.

As at 31/3/2011, current ratio stood at 1.65 times- an improvement from 1.35 times as at 31/3/2010.

Valuation

Airasia (closed at RM3.19 yesterday) is now trading at a PE of 8.7 times (based on last 4 quarters' EPS of 36.8 sen). However, it must be noted that the last 4 quarters' total net profit of RM1.014 billion consists of net forex gain of RM370 million. If we exclude this forex gain from the net profit, the EPS would be adjusted lower to 23.4 sen. This would give an adjusted PE of 13.6 times.

Singapore Airlines Ltd [SIA] (SGX Code: C6L), a full-service airline, is currently trading at a PE of 15.4 times. SIA's top-line & bottom-line did not grow over the past 4 years (from FY Mar2008 to Fy Mar2011). Turnover dropped from S$15.97 billion to S$14.52 billion while Net Profit plummeted tfrom S$2.05 billion to S$1.09 billion. For more, go here. SIA has just announced that it would be started a low-cost airline next year to capture the market for budget flyers.

When we compare the two airlines, Airasia looks the more promising model while SIA is well-known to be financially strong. Since Airasia is trading at a lower PE multiple than SIA, I would consider its upside potential to be better. If it can command the same PE multiple as SIA, Airasia's fair value could be RM3.60.

Technical Outlook

Airasia is in an uptrend line, with support at RM2.85. Its immediate support is the horizontal line at RM3.05


Conclusion

Based on good financial performance, attractive valuation & positive technical outlook, Airasia is still a good stock for long-term investment.