AirAsia Bhd
(Feb 27, RM2.62)
Downgrade to hold with a lower target price (TP) of RM2.65: AirAsia’s financial year ended Dec 31, 2014 (FY14) core net profit of RM407 million (-27% year-on-year) was below ours and consensus estimates. Competition from Malaysia Airlines and Malindo Air is biting hard, forcing AirAsia to play defensive which is unfamiliar territory. 

AirAsia’s FY14 core net profit was below expectations at 86% of ours and 82% of consensus estimates. Load factors have declined considerably (-6.7 percentage points year-on-year) in the fourth quarter of FY14 (4QFY14) which implies that AirAsia has been losing market share to competitors.

Furthermore, many cost items (staff, finance, and other expenses) surged significantly, which is unexpected. There were some noteworthy updates from management: first quarter of financial  year ending Dec 31, 2015 (1QFY15) load factor could dip to 74% (from 78% in 4QFY14) due to the aftermath of Indonesia Airlines QZ8501. Management asserts things will be back to normal post-1QFY15. Focus is to build up cash reserves. No dividends are to be paid in FY14, and 14 aircraft are slated for sale-and-leaseback. 

Besides, management assures no capital raising in 2015. AirAsia’s fortunes greatly depend on competitors acting rationally. We have not seen any tangible changes at Malaysia Airlines, and Malindo seems to be very comfortable with its growth plans. Therefore, AirAsia’s outlook in 1HFY15 will continue to be challenging. We lower our FY15 to FY16 earnings forecasts by 9.5% and 5.2% respectively based on the latest guidance on load factor and yields. We revise some cost items (staff, maintenance, finance, and other expenses) assumptions to reflect FY14’s performance. We downgrade AirAsia to “hold” (from “buy”) with revised TP of RM2.65 (from RM2.94) based on an unchanged nine times FY15 price-earnings ratio peg. — Maybank IB Research, Feb 27

This article first appeared in The Edge Financial Daily, on March 2, 2015.