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PP 7767/09/2010(025354)    

PP 7767/09/2010(025354)

 
PP 7767/09/2010(025354)    
 

Malaysia

Corporate Highlights

 

RHB Research Institute Sdn Bhd A member of the RHB Banking Group

 

Company No: 233327 -M

Results/Briefing Note

 

MARKET DATELINE

 

1 March 2010

 

AirAsia

 

Share Price

:

 

RM1.44

Fair Value

:

RM1.49

 

Recom

:

Market Perform

Strong FY12/09 Performance, More “Disciplined” Growth Going Forward

 

(Maintained)

 

Table 1 : Investment Statistics (AIRASIA; Code: 5099)

Bloomberg: AIRA MK

 

Net

Net

 

FYE

Turnover

Profit#

EPS#

Growth

PER

C.EPS*

P/CF

P/NTA

ROE

Gearing

NDY

Dec

(RMm)

(RMm)

(sen)

(%)

(x)

(sen)

(x)

(x)

(%)

(%)

(%)

2009

3,178.9

449.1

18.3

>100

7.9

-

(3.4)

1.3

16.9

2.6

0.0

2010f

3,353.5

305.3

11.0

(39.9)

13.1

21.0

(3.0)

1.4

10.3

2.9

0.0

2011f

3,585.0

340.3

12.2

11.5

11.8

22.0

(3.2)

1.2

10.3

3.1

0.0

2012f

3,905.6

394.1

14.2

15.8

10.2

-

(3.5)

1.1

10.6

3.3

0.0

Main Market Listing/Non Trustee Stock /Non Syariah-Approved Stock By The SC

#Excluding EI

* Consensus Based On IBES

 

Strong FY12/09, but not good enough to the market. Excluding RM191.9m exceptional gains, normalised FY12/09 PBT of RM447.5m exceeded our forecast by 22% but missed the market consensus by 6%.

Vs.

Consensus

Above

 

In Line

 

Below

RHBRI

More “disciplined” growth. AirAsia guided forward-year capacity growth of 11-14%. This is lower than 15-20% it guided in early last year, and 20- 30% before last year. While AirAsia’s rationale is it is unsure if the new LCCT will be completed in time (i.e. by end-2011), we believe the writing is on the wall that the budget airline industry in the region is getting more crowded, with supply growth seemingly going to outstrip demand growth.

Issued Capital (m shares) Market Cap(RMm)

 

2,758.3

3,529.8

Daily Trading Vol (m shs)

5.0

52wk Price Range (RM)

0.91-1.54

 

Major Shareholders:

 

(%)

Tune Air

30.1

 

EPF

7.4

FY12/10 fuel requirement now partially hedged. AirAsia has hedged forward 17% and 7% of its fuel requirements in 1Q and 2QFY12/10 at US$83.55/bbl and US$81.70/bbl (Singapore Jet Kerosene). It has also hedged forward cracks (between Singapore Ket Kerosene and WTI) at $8.07/bbl that, according to AirAsia, represents an additional 23% hedge of its fuel requirement in Feb-Dec 2010.

Nomad

5.8

 

FYE Dec EPS Revision (%)

FY10

FY11

FY12

+26

+59

-

Var to Cons (%)

-48

-44

-

 
 

PE Band Chart

 

Bookings good but yields may be weak, gearing still high. AirAsia’s forward bookings appear stronger vis-à-vis a year ago. However, we believe these could have been achieved at the expense of yields via continued price discounting. AirAsia’s net debt and gearing stood at RM6.8bn and 2.6x as at 31 Dec 09 that we consider still high.

Forecasts. We are raising FY12/10-11 net profit forecasts by 26% and 59%, having raised our assumptions on yields that more than offset a lower annual capacity growth assumption of 12.5% vis-à-vis 14% previously.

Road to recovery not without speed bumps. We believe the airline sector is poised for improved prospects in 2010, in line with the recovery in the global economy, but not without some speed bumps along the way such as: (1) A mild rebound in the global economy will not materially stimulate demand for air travel; (2) Over the short term, new capacity will continue to flood the market, intensifying competition and capping yields; and (3) Rising crude oil prices that will crimp margins.

Maintain Market Perform. Indicative fair value is raised by 6% from RM1.40 to RM1.49 based on 16x revised FY12/10 EPS (in line with Ryanair), adjusted for RM739.1m owed to AirAsia by 49%-owned associates Thai AirAsia and Indonesia AirAsia that translates to 27sen/AirAsia share.

PER = 16x PER = 12x PER = 8x
PER = 16x
PER = 12x
PER = 8x

Relative Performance To FBM KLCI

AirAsia FBM KLCI
AirAsia
FBM KLCI

Joshua CY Ng (603) 92802151 joshuang@rhb.com.my

Please read important disclosures at the end of this report.

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Strong FY12/09 Performance, More “Disciplined” Growth Going Forward ♦ Strong FY12/09, but not good enough

Strong FY12/09 Performance, More “Disciplined” Growth Going Forward

Strong FY12/09, but not good enough to the market. Excluding RM191.9m exceptional gains (largely from forex and the sale-and-lease-back of aircraft), normalised FY12/09 PBT of RM447.5m exceeded our forecast by 22% but missed the market consensus by 6% (We normally analyse AirAsia’s results at the PBT level as net profit is always distorted by lumpy deferred tax).

More “disciplined” growth. AirAsia guided forward-year capacity of 11-14%. This is lower than 15-20% it guided in early last year, and 20-30% before last year. While AirAsia’s rationale is it is unsure if the new LCCT will be completed in time (i.e. by end-2011), we believe the writing is on the wall that the budget airline industry in the region is getting more crowded, with supply growth seemingly going to outstrip demand growth. We are cutting our FY12/10-12 assumption on annual growth in capacity in terms of available seat km (ASK) from 14% to 12.5% to bring ourselves more in line with the latest guidance.

FY12/10 fuel requirement now partially hedged. AirAsia has hedged forward 17% and 7% of its fuel requirements in 1Q and 2QFY12/10 at US$83.55/bbl and US$81.70/bbl (Singapore Jet Kerosene). It has also hedged forward cracks (between Singapore Ket Kerosene and WTI) at $8.07/bbl that, according to AirAsia, represents an additional 23% hedge of its fuel requirement in Feb-Dec 2010. YTD, the price of Singapore Jet Kerosene has averaged at US$83.96/bbl and was last traded at US$85.35/bbl. In our earnings forecast, we assume AirAsia’s jet fuel cost to average at US$85/bbl. We view positively AirAsia’s move to hedge forward its fuel requirement. We view this as a step in the right direction in strengthening its operating risk management.

Bookings good but yields may be weak, gearing still high. AirAsia’s forward bookings appear stronger vis- à-vis a year ago. Take-up rates as at 22 Feb 2010 for Feb-May 2010 departures were 72%, 43%, 27% and 29% vis-à-vis 64%, 41%, 18% and 11% a year ago. However, we believe these could have been achieved at the expense of yields via continued price discounting (AirAsia did say that it remains “yields passive load active”). The on-going capex programme, largely aircraft purchases, raised AirAsia’s net debt and gearing to RM6.8bn and 2.6x as at 31 Dec 09 from RM6.2bn and 2.4x as at 30 Sep 09. With a net gearing of 2.6x, we feel that AirAsia’s balance sheet is stretched.

Forecasts. We are raising FY12/10-11 net profit forecasts by 26% and 59%, having raised our assumptions on yields that more than offset a lower annual capacity growth assumption of 12.5% vis-à-vis 14% previously.

Risks to our view. These include: (1) A stronger-than-expected recovery in the air travel sector; (2) Lower jet fuel cost; and (3) Effective containment of outbreaks of pandemic diseases.

Road to recovery not without speed bumps. We believe the airline sector is poised for improved prospects in 2010, in line with the recovery in the global economy, but not without some speed bumps along the way such as:

(1) A mild rebound in the global economy will not materially stimulate demand for air travel; (2) Over the short term, new capacity will continue to flood the market, intensify competition and capping yields; and (3) Rising crude oil prices that will crimp margins.

Maintain Market Perform. Indicative fair value is raised by 6% from RM1.40 to RM1.49 based on 16x revised FY12/10 EPS (in line with Ryanair), adjusted for RM739.1m owed to AirAsia by 49%-owned associates Thai AirAsia and Indonesia AirAsia that translates to 27sen/AirAsia share (AirAsia is hopeful that the amount will be fully repaid by 2013). We do not believe the valuation of Tiger Airways of 23x 1-year forward earnings is meaningful and relevant to AirAsia at this point. We see the high valuation of the newly listed Singapore-based low-cost carrier as nothing more than “new-listing euphoric honeymoon premium” that is temporary in nature.

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Table 2: Earnings Review (YoY Cumulative) FYE Dec 2008 2009 YoY Observations/Comments (RM'm) 12M

Table 2: Earnings Review (YoY Cumulative)

FYE Dec

2008

2009

YoY

Observations/Comments

(RM'm)

12M

12M

Chg

Turnover

2,851.8

3,178.9

11%

Driven largely by a 14% growth in RPK. Yields in terms of revenue per ASK actually contracted by 13%. Strong topline growth and lower fuel cost. Expanding A320 fleet.

EBITDA Dep'n & Amort'n EBIT

791.7

1,239.0

56%

(347.0)

(424.6)

22%

444.8

814.4

83%

 

(264.3)

(366.9)

39%

Rising funding cost for an expanding fleet. Shares of Thai AirAsia’s losses of RM40m and Indonesia AirAsia’s losses of RM31.7m in FY09 were not reflected as AirAsia already ceased equity accounting for these two associates as its investments in them had already been fully wiped out by accumulated losses.

Net inc/(exp) Associates

0.0

0.0

nm

EI

(1,049.7)

191.9

nm

Forex gain/(loss)

(235.0)

123.6

nm

RM strengthened against USD. Largely gains from the sale and lease back of aircraft. FY08 losses were largely due to costs of unwinding of out-of-the-money fuel hedges and non- recovery of margin held by Lehman Brothers.

Others

(814.7)

68.3

nm

Pretax profit

(869.2)

639.3

nm

Taxation

372.6

(90.3)

nm

Deferred taxation of –RM91.9m in FY09 on reduced capex, +RM376.4m in

 

FY08.

Minority interest

0.0

0.0

nm

Net profit

(496.6)

549.1

nm

EPS (sen)

(20.9)

22.4

nm

Pretax profit (Ex-EI) Net profit (Ex-EI)

180.5

447.5

>100%

Strong topline growth and lower fuel cost.

176.7

449.1

>100%

EBIT margin

16%

26%

10% pts

Lower fuel cost.

(30%)

20%

51% pts

Pretax margin Effective tax rate

Key Operating Stats - M'sia RPK (m) ASK (m) Load factor (%) Rev per ASK (UScent) Cost per ASK (UScent) Passengers carried (m) Av. Fares (RM) Av. No. of aircraft Fuel consumed ('000 barrels) Fuel cost (US$/barrel)

43%

14%

-29% pts

13,485

15,432

14%

Demand boosted by heavy price discounting. Expanding A320 fleet. Just a slight drop on heavy price discounting. On heavy price discounting. Lower fuel cost. Demand boosted by heavy price discounting. On heavy price discounting. Expanding A320 fleet. Expanding A320 fleet.

18,717

21,977

17%

75.4%

75.0%

-0.4% pt

4.43

3.84

-13%

3.84

2.95

-23%

11.81

14.25

21%

204

168

-17%

36.6

43.1

18%

3,254.2

3,779.7

16%

127.9

70.4

-45%

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Table 3: Earnings Review (QoQ) FYE Dec 2009 2009 2009 2009 QoQ Observations/Comments (RM'm)

Table 3: Earnings Review (QoQ)

FYE Dec

2009

2009

2009

2009

QoQ

Observations/Comments

(RM'm)

1Q

2Q

3Q

4Q

Chg

Turnover EBITDA Dep'n & Amort'n EBIT

714.2

657.4

739.7

894.1

21%

Peak period for air travel.

362.2

318.5

230.3

328.0

42%

(98.2)

(101.8)

(108.2)

(116.4)

7%

Growing fleet. Higher fuel cost

264.1

216.7

122.0

211.6

73%

 

(98.1)

(88.3)

(88.2)

(92.4)

5%

Net inc/(exp) Associates

0.0

0.0

0.0

0.0

nm

Not reflected were shares of Thai AirAsia’s RM14.9m profits in 1Q, RM4m, RM19.7m and RM31.2m losses in 2- 4Q, and shares of Indonesia AirAsia’s RM5.6m and RM10.7m losses in 1-2Q, RM10.4m profits in 3Q and RM25.8m losses in 4Q.

EI

(41.8)

9.7

102.4

121.5

19%

Forex gain/(loss)

(90.4)

11.7

102.4

99.8

-3%

RM strengthened against USD.

Others

48.5

(1.9)

0.0

21.7

nm

Pretax profit

124.1

138.2

136.3

240.8

77%

Taxation

79.0

1.0

(6.2)

(164.1)

>100%

Deferred tax reversed from positive to negative on reduced capex.

Minority interest

0.0

0.0

0.0

0.0

nm

Net profit

203.2

139.2

130.1

76.7

-41%

Hit by lumpy negative deferred tax.

EPS (sen)

8.6

5.9

5.3

3.1

-42%

Pretax profit (Ex-EI)

166.0

128.4

33.8

119.2

>100%

Peak period for air travel.

EBIT margin

37%

33%

16%

24%

7% pts

17%

21%

18%

27%

9% pts

Pretax margin Effective tax rate

Key Operating Stats - M'sia RPK (m) ASK (m) Load factor Rev per ASK (UScent) Cost per ASK (UScent) Passengers carried (m) Av. Fares (RM) Av. No. of aircraft Fuel consumed ('000 barrels) Fuel cost (US$/barrel)

(64%)

(1%)

5%

68%

64% pts

3,487

4,056

3,769

4,410

17%

Peak period for air travel. Peak period for air travel.

5,207

5,520

5,449

5,863

8%

69.7%

74.8%

75.4%

79.4%

4.0% pts Peak period for air travel.

3.78

3.35

3.58

4.18

17%

Better pricing power during peak period for air travel.

2.38

2.25

3.21

3.27

2%

Higher fuel cost. Peak period for air travel. Better pricing power during peak period for air travel. Growing A320 fleet.

3.15

3.52

3.59

4.00

11%

198

160

142

176

24%

41.0

42.8

43.5

45.0

3%

na

na

940.4

1,017.3

8%

55.2*

66.7*

79.3

80.1

1%

*Market spot rate, not AirAsia's number. AirAsia only started disclosing actual fuel cost from 3QFY12/09

Table 4: Earnings Forecasts

Table 5: Forecast Assumptions

FYE Dec (RMm)

FY09a

FY10F

FY11F

FY12F

FYE Dec

FY10F

FY11F

FY12F

Turnover Turnover growth (%)

3,178.9

3,353.5

3,585.0

3,905.6

Load factor (%) Jet fuel cost (US$/barrel)

72

75

75

20.4

5.5

6.9

8.9

85

85

85

EBITDA EBITDA margin (%)

1239.0

1100.7

1279.5

1483.0

39.0

32.8

35.7

38.0

Depreciation

-424.6

-369.3

-416.4

-469.4

Net Interest

-366.9

-424.6

-521.3

-618.1

Associates

0.0

0.0

0.0

0.0

EI

191.9

0.0

0.0

0.0

Pretax Profit

639.3

306.8

341.8

395.6

Tax

-90.3

-1.5

-1.5

-1.5

PAT

549.1

305.3

340.3

394.1

Minorities

0.0

0.0

0.0

0.0

Net Profit

549.1

305.3

340.3

394.1

Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or

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strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor

strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors, officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the actions of third parties in this respect.

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