AmResearch reaffirms BUY on AirAsia

AirAsia Bhd (Aug 9, RM1.60)
Reaffirm buy at RM1.65 with fair value raised to RM2.20: We reaffirm our buy rating on AirAsia and raise our fair value to RM2.20 from RM2 previously, following an upwards earnings revision and after rolling over our valuation base to FY11F. Our valuation continues to peg AirAsia at nine times PER, at a 40% discount to its historical average valuation of 14 times.

We have raised our earnings projections by 2% to 8% over FY10-12F to reflect stronger traffic growth and better load factor assumptions. Our projections are now 10% to 16% higher than street estimates and we think a consensus earnings revision is underway in the near term.

Based on forward booking indications, passenger traffic is expected to grow by a robust 24% this year, driven by improving underlying demand and new route introductions, especially in India and China. Capacity remains well managed at an expected 10% ASK (available seat kilometre) growth (FY10F), leading to an expected five percentage-point improvement in load factor to 77%.

AirAsia has toned down aircraft delivery by a further eight for FY11F, which should keep capacity outlay tight and load factor close to optimal levels. The management is in talks with Airbus to cap deliveries at a maximum 12 aircraft per annum, which will stretch delivery by five years up to 2019. Our FY11F net gearing falls to 2.2 times from 2.5 times after slashing FY11 aircraft delivery forecast.

Listing of Thai AirAsia (TAA) in 2Q11 and Indonesia AirAsia (IAA) in 2Q12 should crystallise the value of AirAsia's investments in its associates, improve transparency and recapitalise the balance sheets of TAA and IAA. TAA is looking to raise about RM400 million via its IPO, which should reverse its shareholders' deficit of RM200 million currently.

Ancillary income growth is expected to gain traction with the introduction of Red Megastore last month feed ing into the existing region-wide courier service. AirAsia's belly cargo space is only 25% utilised, leaving a lot of room for growth, which flows directly to its bottom line. AirAsia is targeting ancillary income to account for 20% of revenue from 13% in FY09.

Valuation-wise, AirAsia remains the cheapest airline stock around, trading at just seven times FY11F earnings. This is at a 40% discount to Tiger Airways' valuation of 12 times and a 50% discount to AirAsia's historical average valuation of 14 times. We think improving core underlying fundamentals, balance sheet de-risking initiatives and turnaround at associates should trigger a strong share price re-rating. — AmResearch, Aug 9



by The Edge Financial Daily
This article appeared in The Edge Financial Daily, August 10, 2010.