Business

Wednesday May 16, 2012

AirAsia defies industry trend, demand for low-cost flights to remain resilient


AIRASIA BHD

By AmResearch

Buy (maintain)

Target price: RM4.20

WE maintain a “buy” on AirAsia Bhd with an unchanged fair value of RM4.20 per share, ahead of its first quarter ended March 31 (1Q12) results announcement on May 23.

Our fair value continues to peg the stock at 12 times the financial year ending Dec 31 forecast (FY12F) earnings. From an operating perspective, AirAsia defied industry trends in 1Q12, when it registered a 12% year-on-year growth in raw passenger traffic to 4.8 million in its Malaysian operations.

In terms of revenue-passenger kilometre (RPK), traffic grew by 9% given a shorter average stage length. Loads were maintained at 80.3% in 1Q12 versus 80.1% in 1Q11.

The low-cost carrier's growth was driven by the introduction of new routes. Its 1Q12 operating statistics underpin our view that demand for low-cost flights remains resilient compared to full service carriers (FSCs). Tiger Airways, as a comparison, saw RPK traffic contract by 17% and loads fall by 5% year-on-year over the same period. However, safety issues related to its Australian operations exacerbated this.

We foresee yield improvement in FY12F driven primarily by the exit of Firefly's jet operations from Nov 2011. As a comparison, AirAsia's yields grew 8% year-on-year in 4Q11, reversing a 2% to 21% year-on-year yield contraction in the past two years. With the assumption of a seasonal contraction of 8% in 1Q versus 4Q (historical three-year trend), we estimate 1Q12 yields at 15.5 sen per RPK, which implies an 11% year-on-year growth.

Despite a 10% higher fuel price year-on-year, we estimate that 1Q12 core earnings may register flattish year-on-year growth of between RM160mil and RM170mil. Buffers to the higher fuel prices include an 11% year-on-year yield growth, partly inflated by the absence of fuel surcharge in 1Q11; 9% year-on-year traffic expansion.

At our estimated net profit, AirAsia's 1Q12 will account for 21% to 22% of our FY12F earnings of RM767mil and 17% to 18% of consensus FY12F estimates of RM920mil.

A key risk that may affect our projections is fuel price. In 1Q12, jet fuel averaged US$132 per barrel versus our full-year forecast of US$125 per barrel. However, jet fuel price peaked in March and has now eased to US$125 per barrel levels.

From a valuation standpoint, AirAsia is cheap at an implied 10 times FY12F earnings. In comparison, its low cost carrier peer, RyanAir trades at 13 times its forward price earnings ratio.

PLANTATIONS SECTOR

By: RHB Research Institute

Neutral (downgraded)

WE believe the time has come to start trimming holdings of plantation stocks, as we expect crude palm oil (CPO) prices to fall further on the back of the seasonal peak production period for CPO and improved prospects for the other vegetable oils in 2013.

Although there have been no significant changes to the supply and demand dynamics of the vegetable oil industry, we have noted some slight shift in focus and direction of late, and we believe a lot of the positive factors have already been fully-reflected in prices. In our recent sector reports, we have been cautioning investors to lock in profits once a decent return has been obtained and to only buy on dips.

We reiterate this view, but given the prospects of weaker CPO prices in the second half of 2012, we believe it is no longer justifiable for the larger plantation stocks to trade at a significant premium to the market, and are downgrading our valuation targets accordingly.

We are revising down our valuation benchmarks, and are now attributing a target price to earnings ratio of 14 times to 16 times for the big cap stocks (from 15 times to 17 times), 11 times to 13 times for the mid-cap stocks (from 12 times to 14 times) and seven times to nine times for the small cap stocks. We are downgrading our call on Genting Plantations to market perform (from outperform) and our call on KLK to an underperform (from market perform).

We are downgrading our sector recommendation to neutral (from overweight). Notwithstanding our cautious view on CPO prices, we highlight that Sime Darby is a situational play, as we believe the upcoming listing of Felda Global would have some positive knock-on effect on its valuations. We also see SGX-listed First Resources as a beneficiary of the change in export tax structure in Indonesia.

We maintain our view that CPO prices would remain strong in the first half of 2012, before weakening in the second half, on the back of seasonal factors. We believe CPO prices would average about RM3,200 to RM3,300 per tonne in first half 2012 and about RM2,900 to RM3,000 per tonne in the second half.

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