AirAsia Bhd 
(Sept 4, 93.5 sen) 
We reiterate our outperform recommendation and price-earnings ratio (PER)-based target price (TP) of RM1.88: We met the investor relations team of AirAsia Bhd for updates on its operations and outlook for the second half of financial year 2015 (2HFY15). 

The key takeaways are: i) its turnaround plans and fundraising exercise for both its Indonesian and Philippine units are on track; ii) yield is expected to improve towards the end of this year; and (iii) positive on 2HFY15 performance due to seasonally stronger quarters and capacity reduction by Malaysia Airlines.

Indonesia AirAsia (IAA) is currently considering the option of issuing non-voting redeemable and convertible preference shares to deal with its negative equity position with the conversion of part of its receivables. 

Nevertheless, discussions with existing shareholders are still ongoing and expected to be completed by the end of this month. 

Meanwhile, its initial plan to issue new convertible bonds of about US$150 million (RM646.5 million) is on track and expected to be completed by the end of FY15. 

Meanwhile, Philippines AirAsia’s (PAA) board in July approved of a new equity injection of five billion pesos (RM459.2 million) and also agreed on the plans of issuing new convertible bonds, which the term sheets are currently being drafted.

IAA has been removing at least four to five aircraft from Jakarta, Bandung, Denpasar and Medan starting in August to improve its aircraft utilisation. 

To deal with Indonesia’s floor price ruling, IAA targets to shift about 65% of its capacity to international routes, which have a higher margin than domestic routes. 

It will also terminate its unprofitable routes, such as Jakarta-Medan and Denpasar, Bali-Solo, to minimise its losses. 

Meanwhile, PAA will be selling two of its older aircraft in Zest, and is in discussion for an early return of at least two older leased aircraft to third-party lessors by end-2015. 

To further improve its profitability, PAA is expected to reduce its capacity primarily from its Cebu hub and redeploy it to China routes, which have a higher-yield market.

We maintain “outperform” on AirAsia with a TP of RM1.88 pegged to 10 times FY16F (forecast) earnings per share (20% discount).

Our TP implies a 98.1% potential upside from the current level. At the current share price, AirAsia is trading at 2016F price-to-book value of 0.46 times and at a compelling PER of four times, which is at its lowest four-year historical PER. 

We believe in AirAsia’s future performance, based on a positive fare trend, strong growth in ancillary income, lower fuel prices and a strong brand name in Southeast Asian markets. — PublicInvest Research, Sept 4

This article first appeared in digitaledge Daily, on September 7, 2015.