MQ Research: AirAsia's target price upgraded to RM3.50!

The AirAsia journey continues to excite many investors with the share price gaining an additional 2.6% to RM2.34 on Thursday.  In May alone, the share price has surged a whopping 23.2%!  Call warrants listed over AIRASIA followed closely with AIRASIA-C29 gaining 225%.
Ahead of AirAsia’s 1Q16 results due at the end of this month, Macquarie Equities Research (MQ Research) has revised the target price (TP) of the low-cost airline from RM3.00 to RM3.50.  Find out why below..

Event

• MQ Research reiterates their Outperform recommendation on AirAsia with a revised TP of RM3.50 (54% TSR) ahead of 1Q16 results due out at the end of May. Despite less aircraft operated by its Malaysian business, AirAsia Malaysia carried 17% more passengers in a period where the industry only grew 3%. This, together with lower fuel prices and a more rational competitive environment in Malaysia, should support AirAsia to deliver a 51% increase in FY16 profits, its highest ever profit. The stock is trading on 6.6x 17E EV/EBITDAR based on MQ Research’s new estimates. MQ Research’s TP of RM3.50 implies an17E EV/EBITDAR multiple of 8.6x, on par with its historical forward multiple.

Impact

• 1Q16 preview

MQ Research estimates AirAsia will report an adjusted profit of ~RM265m (+88% YoY) in 1Q16, 25% of MQ Research’s FY16E, but representing 32% of consensus estimates. MQ Research expects revenue growth of 19% in the quarter will be driven by a 26% revenue passenger per kilometer (RPK) growth. A pax yield decline of 3% is expected given the current weak yield environment. MQ Research are expecting unit cost (CASK) to remain flattish given the Ringgit weakened on average 14% YoY pcp. MQ Research expects AirAsia to deliver an EBITDA of ~RM530mn (+25% YoY). Thai AirAsia’s profit of RM95mn is expected to be higher than the losses at its Indonesian and Indian associates. MQ Research forecast its Philippines associate to turn profitable in 1Q16.

 

• Got that sunshine in its pocket

2016 is turning out well for AirAsia, in MQ Research’s view. AirAsia is delivering faster passenger growth than the industry as evidenced by its 1Q16 operating statistics released earlier this month, which supports MQ Research’s trade down thesis. With 70% of its 16E fuel requirement being hedged at US$55/bbl, a 1% strengthening of the Ringgit could increase 16/17E profit by 1.1-2.0%. The decision by its competitor Malindo Air to become a full service airline MQ Research believes will mitigate downward pressure on yields. MQ Research assumes yields will fall by 2% in FY16E. An uplift in the bottom-line to be driven by cash unit cost reduction of 10%.

 

• Downside risk to our recommendation

A faster pax yield decline than expected is the biggest risk to MQ Research’s recommendation in MQ Research’s view. Asean carriers reported -14% to +5% yield change in FY15A. MQ Research believes other key downside risks are non-payment from Indonesia AirAsia’s local shareholder for its portion of the perpetual bond, stronger dollar and demand slowdown.

Earnings and target price revision

• MQ Research increases their FY16-18E adjusted profit by 20-22% mainly on the back of a stronger Ringgit assumption and better-than-expected operating statistics. MQ Research factors in the impending RM1bn share placement. MQ Research rolls forward to FY17E. In sum, MQ Research raises their TP by 17% to RM3.50 from RM3.00.

Price catalyst

• 12-month price target: RM3.50 based on a Sum of Parts methodology.
• Catalyst: 1Q16 earnings announcement

Action and recommendation

• Reiterate Outperform.

Source: Macquarie Research - 20 May 2016