KENANGA AirAsia - HOLD - 17 Mar 2008

AirAsia - Tough time with high oil price (Company Update)
Price: RM1.41
Target Price: RM1.40
Recommendation: HOLD



· Downgrade FY08 and FY09 net profit projection by 17% and 15% respectively as we revise our 2008 and 2009 oil price assumption upwards from US$85/barrel to US$95/barrel and US$90/barrel respectively, following the recent oil price spiked above US$110/barrel and similiar revision by the US Energy Information Administration (EIA).

· Oil price shot past the roof. WTI soared above US$100/barrel on 19 Feb and ended the week at US$110/barrel. Jet fuel meanwhile surged further to reached an unprecedented level of US$129/barrel at the time of writing.

· Detrimental impact of high oil price as AirAsia has only 30% of 1H08 fuel requirements hedged at US$79.5/barrel and remain uncovered for the rest of 2H08.The effective lower hedge was mainly due to the short options written by AirAsia. Recall that AirAsia shorted WTI at US$82.60 with knock-in at US$90 effective for 30 months beginning from Jan 2008 for 150,000 barrels per month. Fuel cost comprised of 50% of AirAsia's operating cost and is the single largest swing factor for AirAsia's earnings.

· The short option remains a de-rating factor for AirAsia as investors continue to be spooked by the high oil price. Additional hedge for FY08 is unlikely in near term given the current high oil price. A potential re-rating catalyst for AirAsia is to bite the bullet and to completely offset the short options. Though AirAsia could incur a one-off loss from this offset, we believe investor would welcome the move as it removes much uncertainty.

· Challenging outlook for the sector as potential global economic deceleration and high oil price could act as a double whammy to airlines. Oil price remains our key concern as negative earnings impact could be larger than expected should the current high oil price persist for a prolonged period. Maintain HOLD with target price downgraded to RM1.40 based on FY08 PER of 15x after our earnings revision.









KENANGA INVESTMENT BANK BERHAD (15678-H)

Research Department