By Stephanie Jacob
Low-cost carrier AirAsia Bhd is trading down on Bursa Malaysia, following the release of its third quarter results for financial year 2015 (3Q15) which for the first time offered a consolidated view of the whole group including its associates.
According to Reuters, the carrier booked a net loss of RM406 million for the quarter under review versus the RM5.4 million net profit seen in 3Q14. AirAsia blamed foreign exchange losses, its share of losses incurred by associates (from Indonesia AirAsia), and one-off costs related to the sale and leaseback of aircraft for the performance.
In particular, AirAsia booked prior-year unabsorbed losses of RM469 million from Indonesia AirAsia (IAA). To recap, IAA recently concluded a recapitalisation exercise in which AirAsia announced that it will subscribe to 49% of IAA perpetual capital securities amounting to 2.06 trillion rupiah (RM611.83 million). AirAsia will do this by converting 2.06 trillion rupiah out of the 4.28 trillion owed to it by IAA.
Philippines AirAsia (PAA) also made losses for 3Q15, but AirAsia’s equity in this associate has been pared down.
Despite the loss, analysts have largely maintained their calls and positive outlook for AirAsia.
Maybank Research’s Mohshin Aziz said “3Q15 results were pleasing ― beyond the accounting changes bewilderment – as the recovery in yields are better than expected and the company continues to gain cost efficiency”
Revenue for the quarter under review was up 15.1% year-on-year to RM1.5 billion, this was driven by a 19% increase in passenger volume but was dragged down slightly by a 4.5% unit revenue decline. However, unit costs have also declined by 4.5% y-o-y to 12.5 sen per available seat kilometer as a result of a 34% fall in jet fuel prices, he said.
On a net effect basis, core net profit grew 38.4% y-o-y to RM155.6 million. However due to the accounts consolidation, the results were “marred by significant accounting policy changes relating to the associates reclassification,” Mohshin said. Adding that the one-off items “are non-cash in nature and our target price is premised on the Malaysian operations only”.
Looking ahead, Maybank Research’s financial year 2015 (FY15) core net profit forecast has been raised slightly by 0.7%.
While for FY16, it has raised its yield and load factor estimates as it believes the current market is exceptionally strong. It has also lowered it jet fuel assumptions to US$70 per barrel from US$90 per barrel previously. Given AirAsia’s 30% fuel hedge at US$65, Maybank Research is estimating that the airline will pay about US$73 per barrel.
This brings its core net profit assumption for FY16 is RM794.3 million, up 9.6% from before.
Maybank Research has maintained its “buy” call and adjusted its target price to RM2.30 from RM2.05 previously.
It said “this remains based on 8x price-earnings (PE) ratio but we roll forward our base valuation year to 2016. This is the bottom of a typical airline cycle’s 8x to 15x. We believe this is appropriate as the market is generally cautious on the Malaysian aviation market as the country has yet to fully recover from 2014’s multi tragedies”.
Meanwhile, Public Investment Bank has maintained its “outperform” call on the carrier with a target price of RM1.88 based on PE multiple of 10x to its FY16 forward earnings.
It said, “we like AirAsia for its solid long-term potential growth prospects, low-cost competitive advantage and network connectivity and synergies within the AirAsia group. We anticipate AirAsia to benefit from lower fuel prices and yield recovery”.
TA Research however downgraded the airline despite being positive on the group’s fundamentals, due to concerns that the ringgit will trade at an average of RM4.30 to 1 US dollar in 2016 and 2017.
This means it must adjust its FY15, FY16 and FY17 earnings by 171.2%, 3.6% and -5.3% respectively, to take into account the new ringgit assumptions; lower jet fuel prices; capacity and load adjustments for FY17; and RM521.9 million in adjustments for accounting changes in FY15.
It said “we downgrade AirAsia to ‘hold’ with lower target price of RM1.58 from RM1.68 previously, based on revised 10x current year 2016 (CY16) earnings.
“Although we are positive on the group’s fundamentals against the backdrop of low jet fuel prices, we are concerned about the investment risk associated with foreign fund exit as the ringgit would likely depreciate further when the US Federal raises interest rates in December 15, 2015.”
As at 12 pm on Bursa Malaysia, AirAsia is trading down by 7 sen at RM1.33.
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