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AirAsia Bhd
(Jan 23, RM2.80)
Maintain buy with a target price (TP) of RM3.70
: We remain positive on AirAsia Bhd’s prospects following a recent meeting with the management who were upbeat on the airlines’ 2015 prospects.

AirAsia hedged 50% of its financial year 2015 (FY15) jet fuel supply at US$88 (RM317) per barrel, 21.4% below the average price of US$112 per barrel in FY14. The removal of fuel surcharge is on the cards to spur demand but no timeline has been given. The management expects better yields from capacity rationalisation by its competitors and the absence of irrational pricing.

Maintain “buy” with a TP of RM3.70, pegged to FY15 price-earnings ratio (PER) of 10 times. We also see a possible upside to dividends.

We recently met up with AirAsia management to obtain updates. The management was generally positive on AirAsia’s prospects for 2015. Key takeaways from the meeting were 50% of jet fuel requirements for 2015 are hedged at US$88 per barrel, removal of fuel surcharge is likely but no timeline given, expects Malaysia Airlines (MAS) to rationalise its capacity and fare.The management indicated that AirAsia hedged 50% of its 2015 jet fuel requirements at US$88 per barrel. It also mentioned that the hedge could be increased for the entire 2015 supply and extended into 2016. 

The management guided that for every increase or decrease of US$1 in jet fuel price, earnings would be impacted by RM15 million. We assume an average jet fuel price of US$90 per barrel for FY15. This implies that there could be a further upside to our TP should current depressed jet fuel price, which is hovering around US$60 per barrel, persists.

The management expects capacity or available seat per kilometre (ASK) to grow 5%, load factor remaining stable at 80% to 81%, and yields or revenue per available seat per kilometre (RASK) to grow between 3% and 4%. 

We are slightly more conservative, forecasting an increase of 2% ASK growth, load factor of 81%, and a decline of 4% decline in RASK. Our forecasts are predicated on a subdued fleet expansion of five planes in 2015 of which one for Malaysia, two for Thailand and two for Japan while we expect lower RASK to reflect the lower fuel surcharge.

Since reaching its 52-week high of RM2.94 in December 2014, 
AirAsia’s share price has declined by 6.8% following the unfortunate Indonesia AirAsia flight QZ8501 incident. The stock now trades at an attractive PER of 7.4 times. 

While news flow and developments surrounding Flight QZ8501 continue to be the main share price driver in the near term, we believe an epilogue is in sight with retrieval of the flight data and cockpit voice recorder recently by the National Search and Rescue Agency Indonesia. 

The stock is one of our top picks for the sector and within the broader market. We are equally positive on the stock’s prospect for FY15 lending support from the depressed jet fuel price, the absence of irrational pricing and MAS’ capacity rationalisation. — MIDF Research, Jan 23

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This article first appeared in The Edge Financial Daily, on January 26, 2015.

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