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.

Strong 1Q09 results: growing despite the turbulence

● AirAsia’s (AA’s) 1Q FY09 net profit of RM203 mn was in line with our forecast, but exceeded consensus expectations, coming in at 77% of street’s full-year forecast.

● Net profit growth of 26% YoY was driven primarily by higher revenue (+34% YoY) and lower fuel costs, despite taking a RM42 mn charge for forex losses (net of aircraft sale).

● Management will focus on loads; we thus expect average fares to fall. However, we have already factored in a 10% decline in average fares.

● We have cut our FY09 forecast by 5% to reflect the RM42 mn exceptional charge.

● AirAsia is expected to continue on its strong growth trajectory, with a 16% traffic CAGR over the next three years. We thus maintain our OUTPERFORM rating.

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.

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.

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

AirAsia - HOLD - 28 Feb 2008

AirAsia - Within expectations (Results Note)
Price: RM1.54
Target Price: RM1.67
Recommendation: HOLD

· 6MDec07 revenue of RM1.1b was in line with our expectations and market's. Core net profit of RM140.8m excluding forex gain however was 2.2% and 5.9% ahead of our forecast and street's consensus. Stronger performance was driven by a 23.2% growth in passenger volume and improved yields on higher average fare.

· QoQ, revenue and EBITDA shot up 37.1% and 52.6% respectively, lifted by higher average ticket price (2Q: RM214 vs 1Q:RM174) and stronger sales coincide with festive season. Cost/ASK however increased 10.8% sequentially to 11.5 sen as oil prices soared.

· YoY, 6MDec07 revenue soared 39% on the back of: a) 23.2% growth in passenger volumes to 5.2m passengers; b) 5.4% growth in yield (2H07: 16.4 sen against 2H06: 15.5 sen) supported by higher average fare (+14% yoy); and c) strong growth of ancillary income by 51.2% to RM78.3m. Though pre-tax profit of RM276.7m was boosted by a RM134.4m forex gain, normalised growth was still commendable at 57.2%. Notwithstanding the positive operation growth, load factor slipped 2.9 percentage points yoy to 78.4% owning to underperformance of new international long distance routes and aggressive capacity expansion (+37.2%).

· New routes including KL-Singapore and flights to China have been well received, registering average load factor of 85%. Upcoming routes include KL-Hong Kong and KL-Ho Chi Minh to be launched within 2 months should complete AirAsia's link to the whole of Asean.

· Maintain HOLD and target price of RM1.67 based on FY08 PER of 15x as continuing high oil prices couple with the global economic uncertainty should pressure near term performance.

KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department