HLG: 30 May 2008 AirAsia Berhad

HLG: 30 May 2008 AirAsia Berhad - Q108 boosted by forex, deferred tax



AirAsia Berhad SELL



Price target RM0.86



Share price at 29 May RM1.01



Investment summary


Excluding one-off gains, normalized Q108 net profit was 75% below forecast. We cut our rating from a HOLD to a SELL: (1) Filling up new capacity at decent yields is the management’s main challenge, given aggressive near-term new aircraft deliveries and the MAS price war. (2) Under passenger-maximizing mode, it will be difficult to fully pass-through higher fuel prices to end-customers, and AirAsia is only hedged until Jun08.



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.



Perfect storm

AirAsia faces major new aircraft deliveries just when fuel prices reach new highs and MAS launches a price war. This could impact cashflow, and AirAsia is already highly-geared. We cut the stock to a SELL, and think the Street is too aggressive with their EPS forecast.