AirAsia is MER’s top pick in the Malaysian aviation sector

Recently, Malindo Air announced that they will be moving their jet operations to Kuala Lumpur International Airport (KLIA) from the KLIA2 terminal starting from March 15. The move is in line with their effort to better serve the customers with the airline evolving to a full service airline.

Macquarie Equities Research (MER) released a research report on Monday (22 Feb), expressing its positive views on this development as the other Malaysian-based airlines including AirAsia can concentrate on their core businesses. MER also mentions the various benefits AirAsia may have from this event while reiterating the short-haul low cost airline as its top pick. Read on excerpt from a research report titled “A more rational market”…

Event

• MER sees Malindo Air’s decision to evolve into a full service airline and Malaysia Airlines’ capacity cut as positive for the Malaysian aviation sector. Importantly, MER’s random checks of fares suggest a more rationale pricing environment. While the weaker Ringgit may hurt outbound traffic, MER continues to like AirAsia as it benefits from passenger trade-down. AirAsia is trading at 7.5x 17E EV/EBITDAR, below its average trading multiple of 8.9x. MER’s target price (TP) for AirAsia implies 89% upside from current share price.

Impact

• Malaysia Airlines capacity cuts – positive. MER has identified several routes where AirAsia and AirAsia X should gain market share on the back of Malaysia Airlines’ capacity cut. MER expects load factors of airlines to improve and reduce excess capacity in the market. Also, Malaysia Airlines 30% seat cut to Australia bodes well for AirAsia X. In FY14, the Australian business generated negative EBITDAR from previously 44% of total FY12A EBITDAR for AirAsia X.

• Malindo Air evolving into a full service airline – positive. MER views the development positively, as the four key Malaysian-based airlines can focus on their core segments – Malaysia Airlines (medium to long-haul full service), Malindo (short-haul full service), AirAsia (short-haul low cost) and AirAsia X (long-haul low cost). Both Malindo and Malaysia Airlines were the cause of lower yields for AirAsia in 2013. Also, post Malindo's move to KLIA main terminal, MER estimates the AirAsia group of airlines will have 95% (from 84%) of seat capacity out of KLIA2, which charges a lower passenger airport tax than KLIA main terminal.

• More rational pricing environment – positive. MER’s random checks on fares on AirAsia and AirAsia X key routes show that Malaysia Airlines and Malindo ticket prices are at a premium to AirAsia and AirAsia X ticket prices. This should support AirAsia’s load factors, especially as down-trading takes place.

Outlook

• MER reiterates AirAsia as its top pick in the Malaysian aviation sector on (1) it is a beneficiary of passenger down-trading; (2) a more conducive operating environment, with clearer market segmentation post Malindo’s decision to become a full service airline; and (3) upside risk from more incoming Chinese tourists to Malaysia due to its highest market share on Malaysia-China routes, driven by having the highest number of routes.

• AirAsia is currently trading at a 13% discount to its net fleet asset value of RM1.57 and 47% discount to MER’s sum-of-part (SOP) TP of RM2.59.

• MER estimates Malaysia Airports can garner a profit after tax (PAT) uplift of ~RM25m (~11% of 17E PAT) on the back of Malindo’s move to KLIA main terminal.

• MER rates AirAsia X as Neutral, as we remain cautious over its ability to sustain profits for four consecutive quarters in 2016.

Source: Macquarie Research - 25 Feb 2016