AirAsia- More relief for balance sheet

AirAsia- More relief for balance sheet (Company Update)

Price: RM1.22
Target Price: RM1.50
Recommendation: Trading Buy


· Deferment of 15 A320s. Group plans to delay 8 and 7 aircrafts out of the scheduled 24 and 23 deliveries for 2010 and 2011 respectively. The 15 delayed planes will be delivered in 2014. While management confirmed that financings for 2010 and 2011 are in place and attributed the deferments to uncertainty in the new LCCT completion date, we are more inclined to think that the delays are related to its heavily-geared balance sheet.

· Relief to balance sheet and shareholders. We are positive on the plane deferment as this will give a breather to AirAsia’s stretched balance sheet already with a net gearing of 3.7x as of 31 Mac 09. Coupled with the proposed RM500m placement, AirAsia’s FY10 net gearing is expected to reduce to 2.6x from our original forecast of 3.5x.

· Plans to retire B737s and go A320s. Apart from the A320s deferments, group is also looking to dispose 3 owned B737s and retire another 13 leased B737s used by its associates in Thailand and Indonesia. This is not unexpected of as management has always reiterated that it intends to replace all the B737s with its new A320s which are more efficient. AirAsia however needs to find new lessors for the leased planes to avoid penalty from early return of leased planes. Though we believe that it could be challenging to entice buyers or lessors in the downturn, disposal of any B737 is positive as group stands to save leasing, fuel and maintenance costs through deployment of new A320s.

· Merger of AirAsia and AirAsia X? The merger idea which was recently mooted by CEO Tony Fernandes will enable synergies between the short and long haul operation. As an example, the enlarged group could utilise AirAsia X’s plane for the KL-East Malaysia routes during the year end super-peak period without having to seek shareholders’ approval for the related party transaction. As most investors are less familiar to the long haul business and could be resistant to the proposed merger, management has decided to aggressively promote AirAsia X to both local and foreign investors. Nonetheless, we understand that the merger is not likely to materialise in the near term and will largely depend on investors’ acceptance of AirAsia X.

· Placement of 20% new shares for RM500m to be completed in 2H09 and will be allocated for working capital purpose. In addition, group will also receive deposit paybacks for the deferred planes and should end the year with a decent cash balance of c.RM1b.

· Measures to boost ancillary income. Management believes that strong ancillary income is the best buffer against volatile price as opposed to hedging which could involve margin calls. Group recently launched Redbox - a low cost courier service which offers up to 80% price discount compared to other conventional courier services. Other projects in the pipeline include: a) online currency exchange; b) duty free on-line shoppings; c) AirAsia savers account which comes with free flight rewards; and d) Red Megastore – a growing online shopping website which will expand its products range to include various gadgets such as handphones, digital cameras and etc.

· Stable near term outlook. Still strong forward bookings with less last minute ticket sales indicate that more travellers are booking in advance to enjoy cheaper fares. Mounting competition and heavy promotional activities should continue to weigh on yield but benefits load factor. We are adjusting our FY09 and FY10 profit forecasts higher by 1.7% and 1.1% respectively after factoring for lower yield, better load factor and reduced financing cost from the plane delays. Investors’ sentiment we believe has turned more positive towards AirAsia following the deferment plan and proposed share placement. Reiterate Trading BUY on AirAsia with unchanged target price of RM1.50 based on FY09 PER of 9x.