HLG: 8 Apr 2008 AirAsia Berhad - Expensive regional champion

AirAsia Berhad HOLD



Price target RM1.20



Share price at 7 Apr RM1.38



Investment summary


We initiate coverage on AirAsia with a HOLD. While we like the scalability of its business franchise and its long-term secular growth, we think this is priced-in: (1) FY08E normalized PE of 8x and EV/EBITDAR of 8x are a 15%+ premium to MAS’ 7x and 1x respectively. (2) Broker estimates are already aggressive, with +30% yoy growth. (3) AirAsia is still in the early stages of its asset roll-out, and high gearing/capex limit near-term capital management prospects.

We are negative on the airlines sector; (1) negative macro outlook (volatile fuel prices, global economy slowdown) creates a tough operating environment for airlines (2) entry of 400 new aircraft over next two years will increase capacity and potentially cause load factor and yield erosion. For sector exposure, we prefer MAS to AirAsia.



Poor risk-reward

Global airline stocks have fallen –40% YTD on fears of rising crude oil and a slowing global economy. We think AirAsia still offers growth, but at a cost: (1) Valuations are expensive. (2) Balance sheet is leveraged for growth, and any unexpected growth shortfall could be painful.