AirAsia Bhd
(Aug 5, RM1.65)
Maintain outperform at RM1.50 with a target price of RM1.90: AirAsia announced yesterday that it had deferred a further seven aircraft deliveries from 2011 to 2015. This was the third set of deferrals. In total, AirAsia has pushed back the delivery of 23 planes from 2010-2011 to 2014-2015. These deferrals were not unexpected and we believe more deferrals will be announced in the near future.
The first set of postponements was announced on Aug 6, 2009, when eight planes were delayed from 2010 to 2014. The second was announced on Oct 29, 2009, when eight planes were delayed from 2011 to 2014-2015. The latest deferral announced yesterday involves seven planes from 2011 to 2015. This means that AirAsia will take delivery of 16 planes in 2010, followed by eight planes in 2011, 24 planes per annum in 2012-2014 and nine in 2015. No penalties are payable on these deferrals. AirAsia said the deferrals were due to potential infrastructural constraints with the current airport facilities. Until the new LCCT is constructed, the present infrastructure at the terminal will not be able to accommodate Air Asia’s original fleet expansion schedule.
We view the latest deferral positively as slower capacity growth will help lift both its yield and load factor, which is very positive for its bottom line. We also believe that AirAsia has become more realistic about the pace of growth in low-cost travel that it can drive beyond 2010. It has started flying to many new routes to India this year. Since south China and AirAsia’s home turf in Southeast Asia are already well covered, the carrier will be entering a phase of less explosive growth in 2011.
Adding to this is the potential for a more competitive low-cost aviation market in Thailand, given the impending entry of the Thai Airways-Tiger Airways JV into the market. The aircraft delivery deferrals will enable AirAsia to move away from aggressive top line growth in favour of profit growth. The balance sheet will also benefit from lower gearing since the cash flow from operations will not be so quickly eaten up by capital expenditure. With fewer aircraft allocated to Thai AirAsia and Indonesia AirAsia, the associates will be able to use their operating cash flow to pay down related-party debt owed to AirAsia Bhd, rather than accumulate rising amounts of unpaid aircraft leasing charges.
Further deferrals may be announced. We expect AirAsia to announce postponements of its original 2012-2013 deliveries, which remain untouched so far and are fairly heavy at 24 planes each. We think that at least a dozen planes in each year may be postponed to 2015 or beyond.
Maintain outperform, forecasts and target price of RM1.90. We take a positive view of the latest A320 delivery postponements as they will help AirAsia’s balance sheet recover from the heavy gearing and could reduce outstanding related-party receivables. Earnings may also benefit from a more measured pace of expansion since lower capacity growth could help lift load factor and raise yield. We have not factored the latest change in aircraft deliveries into our earnings model pending further clarification from the management. Hence, our forecasts are unchanged in this report.
We also retain our RM1.90 target price, which is based on an unchanged eight times PER, near the midpoint of its four to 10 times forward PER range. Potential re-rating catalysts include yield recovery in 2010, a boost from Singapore’s two integrated resorts, new routes to India and the expansion of the investor pool if AirAsia’s Thai listing plans proceed. AirAsia will be announcing its interim results on Aug 18. We expect it to be strong and in line with our full-year numbers. We will issue a detailed preview note shortly. — CIMB Research, Aug 5
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