AirAsia Berhad: Profit renaissance as fuel prices slide - BUY

PO raised 11% to RM1.50 as AirAsia benefits from downturn
We increase our price objective and reiterate our non-consensus Buy rating. After positing two quarters of recurring net losses in 2Q and 3Q08, we expect a record profit in 4Q. AirAsia is benefiting from the current global downturn as fuel costs (its single largest cost) have fallen by 70%, while revenue is relatively resilient as the air travel market becomes more price sensitive and budget oriented.
Fuel falling faster than revenue; EPS forecasts raised 95%

We have raised our recurring EPS estimates for 2009 and 2010 by 95%. The weak macro environment, plus the removal of fuel surcharges mean we assume that AirAsia's unit revenue per seat falls by 13% in 2009. However, with jet fuel assumed at $70/bbl (down from $126 in 2009 and $62 currently), unit costs are expected to decline by 29%. We expect a record recurring EPS of RM0.10.

Budget airlines do much better than majors in a recession
The world's largest budget airline - Southwest Airlines - has consistently outperformed the major US carriers. During a downturn, its outperformance is typically even more pronounced as passengers switch to the lowest cost alternative. We expect AirAsia to benefit from a similar effect in 2009. AirAsia's growth rate in 2009 is expected to be its slowest since IPO (9 net aircraft), which should support margins.

Reiterate Buy rating: stock oversold after privatization halt
The stock has fallen by a quarter since management aborted plans to take the company private. We believe this remains a possibility when credit markets normalize. However, at just 8.6x on recurring PER for 2009E,, it has the lowest multiple among its global peers. Key risks are fuel, currency and management.