AirAsia Bhd
(Aug 30, RM3)
Maintain hold with an unchanged target price (TP) of RM3.04: Second quarter ended June 30, 2016 (2QFY16) core earnings were RM225 million (+6.7 times year-on-year [y-o-y]; -51% quarter-on-quarter) after adjusting for forex translation, derivative mark-to-market and other non-cash items.

This accounted for 56% of our full-year forecast. The outlook for the second half of FY16 will be more challenging on rising competitive pressures that will impact yields. Our earnings forecasts, “hold” call and TP of RM3.04 are unchanged, the latter pegged at eight times 2016 price-earnings ratio, which represents the lower end of an airline cycle as we think earnings will peak in 2016.

Load factor and yields benefited immensely from the industry capacity crunch as Malaysia Airlines Bhd cut significant capacity. This helped push up the 2QFY16 load factor to a record 86.8%, and yields by 3.3% y-o-y. AirAsia is one of a handful of global airlines recording a positive yield growth in the period.

The forward outlook remains positive and management is confident that load factors will continue to track higher closing to near 90% levels. However, we believe the yield outlook will weaken as competitors, namely Malindo Air and Malaysia Airlines, have boosted their capacity output and have been aggressive in their ticket pricing. The Indonesian, Philippine and Indian associates continue to underperform and drag down the group.

The market has rightfully priced-in all the positives and AirAsia’s share price is near our estimated fair value. The market is upbeat on the scope of a sale of Asia Aviation Capital Ltd, which will free up capital and provide a special dividend payout. We however see this as a one-time push, while it has no positive implication for the future of the business. — Maybank IB Research, Aug 30