The airline has been quietly eking out gains to close at RM2.90 yesterday, recovering RM1.6b in market value since falling to a year-low in April

by MARK RAO / pic by MUHD AMIN NAHARUL

AIRASIA Group Bhd is set for further gains as higher load factors, the turnaround of loss-making subsidiaries and better cost management lifts the airline out of a challenging start to the year.

Since closing 2018 at RM2.97, the share price of the low-cost carrier declined 18.2% or 54 sen to close at a year-low of RM2.43 on April 18, effectively erasing RM1.8 billion from its market capitalisation.

Disappointing corporate earnings, higher fuel expenses, industry uncertainties and the ongoing legal battle with Malaysia Airports Holdings Bhd (MAHB) were among the negative headlines that saw investors paring down their stakes in the company.

The airline has since been quietly eking out gains to close at RM2.90 yesterday, recovering some RM1.57 billion in market value since falling to a year-low in April, and research houses foresee further value strengthening of the company.

Hong Leong Investment Bank Bhd maintained a ‘Buy’ coverage for the low-cost carrier at an unchanged target price (TP) of RM3.35, 15.5% higher than its last closing price, based on a sum-of-the-parts valuation and after accounting for its attractive 90 sen special dividend.

“We remain positive on AirAsia’s outlook given its high load factors and improving yield and ancillary/other income,” its analyst Daniel Wong wrote in a report published yesterday.

He said capacities in Malaysia and Thailand, the largest air operator certificates within the AirAsia group, will be relatively flat this year, indicating further yield improvements as both markets experience high demand with strong load factors at the high-80%.

The company also turned around its loss-making operations in the Philippines while halving its loss from Indonesian operations, both of which are expected to be profitable in 2019, though Indian operations are expected to remain loss-making this year, he added.

Wong said jet fuel costs, which is positively correlated to crude oil prices and constitutes approximately 40% of AirAsia’s operating costs, are expected to come in higher for the remainder of the year but will be offset by the airline’s improved efficiency.

“We are not overly concern on the increase in cost structure as we expect AirAsia to improve its operating efficiency, while increasing its yield and ancillary income to offset the higher jet fuel cost.”

MIDF Amanah Investment Bank Bhd revised AirAsia’s TP from RM2.92 to RM3.29, representing a 12.7% increase and 13.4% higher than the company’s last closing price, following an upward revision in its earnings forecast.

It noted that its TP will be adjusted 90 sen lower after the company’s ex-date for its special dividend on July 29 this year, which is in line with the adjustments to be made to its share price at the time.

“We continue to like AirAsia as the company continues to enhance its cost structure, along with its efforts of rationalising revenue and cost via digitalisation efforts,” its analyst Adam Mohamed Rahim wrote in the report published yesterday.

He said the positive outlook for the company also hinges on its more prudent hedging policy, stable operations with added capacity and improvements made to derive higher values per km flown.

The proposed international departure levy is not expected to have much of an impact on AirAsia’s passenger growth, he added.

Note that the levy was passed in Parliament on April 10, but its implementation was deferred to Sept 1 this year.

AirAsia group CEO Tan Sri Dr Tony Fernandes recently took to Twitter to say that Malaysia needs an integrated tourism plan and not more taxes to grow its tourism industry.

“Malaysia desperately needs an integrated tourism plan. No exit tax, lower visa fees or no visa fees. And online, an airport that understands low-cost airlines,” he wrote on his official twitter account.

For its first quarter ended March 31 this year (1Q19), AirAsia’s net profit contracted 91.6% year-on-year (YoY) to RM96.09 million on the absence on one-off gains which boosted 1Q18 earnings and the higher capacity costs incurred.

Turnover for the airline, however, came in 12.9% higher YoY at RM2.88 billion on passenger growth (up 18% at 12.55 million) and the higher load factor of 88% (from 87% in 1Q18). Average fuel price was flat at US$83 (RM341.74) per barrel.

To minimise fuel price volatility, the company said it hedged 52% to 57% of its fuel requirement for the remainder quarters in 2019 at an average Brent crude oil price of US$61 to US$64 per barrel. Brent oil was traded between US$62 and US$67 per barrel this month.