Monday, May 28, 2007

AirAsia set to soar even higher

ANALYSTS strongly favour AirAsia Bhd as they see good upside to the stock, going forward.

The budget carrier has continued to deliver in terms of financial performance, despite facing tough times in a competitive industry.

Analysts are generally positive about the airline’s future performance, going by its sound management, business model and current form
The region's largest low-cost carrier is one of the most widely covered stocks on Bursa Malaysia. Analysts are generally positive about its future performance, going by its sound management, business model and current form.

A local analyst said the airline's nine-month results were within expectations, buoyed by foreign exchange gains, which helped offset losses from its Indonesian operations.

The air accidents in Indonesia recently, including the Adam Air crash in January and the Garuda accident in March, led to concerns over air travel which resulted in AirAsia's Indonesian unit making an RM8.5mil loss last quarter.

“However, overall, AirAsia managed to post a six-fold increase in its third-quarter net profit, placing the airline on track for a double-digit growth for its financial year ending June 30, 2007,” he said.

For the nine-month period ended March 31, 2007, AirAsia's net profit swelled to RM86.9mil from RM14.1mil in the corresponding period a year ago.

The analyst said AirAsia's recent results showed that the low-cost carrier's business model was a success.

He said AirAsia's revenue for the third quarter rose 53% to RM396mil compared with RM259mil in the corresponding period in 2006, with average fare rising to RM171 per passenger compared with RM123 previously.

According to him, management had attributed the strong earnings to a 39% jump in the number of passengers in the third quarter to 2.16 million compared with the same quarter in 2006, after AirAsia offered more promotions and added flights.

“Moreover, the airline's third-quarter net profit received a substantial boost from a tax adjustment of RM45.1mil,” said the analyst.

Going forward, he said, the continued delivery of A320s would boost capacity while the new services and lower low-cost carrier terminal (LCCT) taxes announced by the Government recently should ensure high load factors.

Airport taxes at Malaysia's LCCTs in Sepang and Kota Kinabalu will be reduced for domestic and international travels effective June 1.

For LCCTs in Sepang and Kota Kinabalu, the airport tax for domestic travel would drop to RM6 from RM9, while for international travel, to RM25 from RM41.

OSK Research senior manager Chris Eng said AirAsia's recent results gave analysts greater confidence that growth was sustainable.

“For calendar year 2008, we put AirAsia on a higher fair value of RM2.40 and upgrade the stock from trading buy to buy as there is greater visibility on the sustainability of earnings,” said Eng.

He said AirAsia's reported annualised pre-tax profit was within the broking house's estimates, although 15.5% above consensus and was achieved despite its Indonesian unit's losses.

Eng said floods in Jakarta hit AirAsia's Indonesian operations in February, causing cancelled flights, and the recent airline crash in Indonesia also dampened travel demand.

However, on a year-on-year basis, AirAsia's growth was spectacular, he said, adding that it managed to add nine planes to its Malaysian fleet.

He said AirAsia had pursued a load factor strategy and that revenue per passenger per km grew by 50.7% year-to-date.

“The airline also increased fuel surcharge and ancillary income-boosting revenue and earnings before interest, tax, depreciation and amortisation (EBITDA),” said Eng, adding that despite increased finance and depreciation charges from the 19 A320s, the increased EBITDA led to a 96% jump in pre-tax profit.

He said new services rolled out such as Web check-in and Xpress boarding services also would improve yield and save time, while lower LCCT taxes would help maintain the attractiveness of AirAsia’s flights.

“These improvements, coupled with strong fleet growth over time, lead us to estimate a 33% compounded annual growth rate for AirAsia's pre-tax profit for the next three years,” said Eng.

He said OSK Research evaluated AirAsia based on its pre-tax profit rather than net profit due to the large deferred tax assets in the books.

“AirAsia managed to report fair numbers even as its Indonesian operations were hit by floods and other airline disasters, as the stronger ringgit allowed the airline to record a foreign exchange gain of RM77mil for the nine months.

“Investors should note that AirAsia has restated its revenues, other income and costs such that insurance revenues and administration charges are now booked under revenue rather than offset against costs,” Eng said, adding that the airline had to record losses from its Indonesian associate above its equity investment as per Financial Reporting Standards 128.

On AirAsia's long-haul services, Eng said: “While the potential from the airline's long haul looks exciting, we feel that it is still too early to impute anything into AirAsia's earnings as yet. With the airline only scheduled to take off in July 2007, the revenue from the franchising of AirAsia’s brand should be minimal for now.”

As for AirAsia’s stake in Fly Asian Xpress, OSK Research understands that it will be structured probably in the form of irredeemable convertible unsecured loan stocks, which would protect the carrier from any start-up losses incurred by its long-haul services.

“As such, although the airline's long haul might add spice to the AirAsia story, we feel that it would be too early to adjust our earnings for now,” said Eng.

Source : STAR
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