RHB Research upgrades AirAsia to Trading Buy, FV RM3.63 (5099)

by **hlk** Wed 12 Sep 2012, 08:30

KUALA LUMPUR: RHB Research Institute has upgraded AirAsia to a Trading Buy from Market Perform and maintained its fair value for the low-cost carrier at RM3.63.
It
said AirAsia's near-term earnings growth prospects are less exciting as
growth from its domestic operation is tapering off, coming from an
enlarged base.
RHB Research also said not helping either, are lingering losses from its new low-cost carrier start-up in Japan and the Expedia JV, given the long gestation periods for these new ventures.
“However,
we believe value has emerged after the knee-jerk selldown on AirAsia
following the recent uptick in crude oil prices as well as on the back
of the latest news on Malindo Airways. Fair value is maintained at
RM3.63 based on 12x FY12/13 EPS, in line with benchmark Ryanair's
one-year forward target PER. Upgrade to Trading Buy from Market
Perform,” it said.
The research house issued the report late Tuesday on news that Malindo Airways, a 51:49 JV between Subang-based National Aerospace & Defence Industries Sdn Bhd (Nadi) and Indonesia-based low-cost carrier Lion Air, is expected to take to the sky in May 2013.
It
was reported that the new low-cost carrier start-up “may have about 100
planes within a decade” (Lion Air has had an outstanding order for 230
B737 aircraft) and it is “looking at selling tickets at AirAsia's
pricing or lower”.
Malindo plans to offer flights within
Malaysia and Indonesia, as well as to Thailand, China, India, Japan and
Australia. Nadi is a privatised Bumiputera-controlled company
(previously owned by Khazanah) engaged in maintenance, repair and
overhaul of aircraft.
“We believe Malindo Airways is eyeing
primarily AirAsia's lucrative domestic market in Malaysia.
Theoretically, Malindo Airways, being a new entrant to the domestic
market in Malaysia, will go all out for market share at the expense of
profitability by undercutting prices.
“AirAsia, on the other
hand, may also want nip the competition in the bud by dropping fares.
This will result in a full-scale price war. However, practically,
Malindo Airways' significance as a threat to AirAsia depends very much
on how quickly and sizeable it can scale up its operations (that remain
unclear at the moment). Over the longer term, its survival also depends
on its ability to beat or at least match AirAsia's extremely low cost
structure,” said RHB Research.