Challenging year ahead for AirAsia

by **Cals** Mon 30 Dec 2013, 11:54

Business & Markets 2013

Written by RHB Research

Monday, 30 December 2013 10:05

AirAsia Bhd
(Dec 27, RM2.20)
Maintain buy at RM2.22 with a fair value of RM3.70: AirAsia’s share price has retreated by about 12% since the low-cost carrier released its results for the nine months ended Sept 30 of financial year 2013 (9MFY13). We think the selldown has been excessive and was, in part, exacerbated by the US Federal Reserve’s move to start scaling back on its quantitative easing programme.

We note that AirAsia’s foreign shareholding had fallen to 49% as at end-November, from 52% in the first half of FY13. In our opinion, the selldown by foreign shareholders may have bottomed out, noting the previous low of 49% in late November 2012.

According to recent news reports, Malindo Air’s owners — Indonesian billionaire and owner of Lion Air Rusdi Kirana and National Aerospace Defence and Industries — have had a falling out, and that the latter may pull out from the business. We note that Malindo Air has denied any conflict among its shareholders

We expect 2014 to remain a challenging year as Malindo Air continues to spread its wings, but we think the carrier may ease up on the aggressive price competition due to its high cost structure.

Carriers in Malaysia are likely to focus on cost savings in FY14, but this is not new for AirAsia as cost control is instilled into its corporate culture. Should both Malindo Air and Malaysian Airline System Bhd (“neutral”, fair value: 30 sen) adopt a more conservative approach in their expansion plans and pricing strategies, it will limit the downward pressure on AirAsia’s yields.

We believe the earnings outlook remains promising for AirAsia as competition wanes and as its cost structure improves when klia2 commences in FY14. We maintain our “buy” call on AirAsia, with our fair value intact at RM3.70, based on an unchanged FY14F target price-earnings ratio (PER) of 12 times versus its current FY14 PER of 7.1 times.

Incorporating the market cap of the group’s listed entities and valuing its unlisted Indonesia unit at 10 times, the Malaysian unit’s earnings are valued at an FY14 PER of only 5.2 times. — RHB Research, Dec 27