AIRASIA (5099) : AirAsia Bhd - Raising forecasts despite QZ8501
Target RM3.50 (Stock Rating: ADD)
The unfortunate crash of QZ8501 on 28 December forces us to materially revise up Indonesia AirAsia’s losses but the benefits of the low oil price to AirAsia group are very significant and overwhelm all other concerns, including a stronger US$. Reiterate Add, with a higher target price based on CY16 sector average P/E of 11x, from 1.7x P/BV. Our core EPS forecasts are raised by 21-64% for FY15-16. Re-rating catalysts include the likely resolution of the Indonesian crisis and the earnings kick from very low oil prices.
Our core EPS forecasts are raised by 21-64% for FY15-16. Re-rating catalysts include the likely resolution of the Indonesian crisis and the earnings kick from very low oil prices.
Indonesia problems to clear
We believe that IAA will be able to resolve all regulatory issues regarding its flight schedules soon and will not be subject to major penalties, if at all. The clearest sign of this is the Minister of Transport’s statement last Friday that non-compliant carriers, including Garuda and Lion Air, may immediately reapply for approval to fly on any of the suspended routes, including IAA’s Surabaya-Singapore route. We also believe that IAA’s sales will not be affected by the accident for a lengthy duration because of the superb way in which management handled the crisis. The comments on Indonesian social media strongly support our assertion. In conclusion, the probability of IAA losing its operating licence, or of its insurers not paying compensation, or of major negative demand contagion to Malaysia and Thailand is very low.
Oil prices very beneficial
The fall in the jet fuel price has been sharp and more than offsets the strength of the US$. So, the overall benefit to AirAsia’s core earnings is significantly positive. Our jet fuel price assumption of US$90/bbl for FY15 (reduced from US$110) is still conservative against the spot price of less than US$70. A US$20/bbl drop in our jet fuel price assumption would lift core EPS by 60%. AirAsia is only 12% hedged for FY15 at US$115/bbl and so, it would benefit immensely from the low oil price. Most importantly, the savings from the cheaper oil is more than enough to offset the incrementally higher debt burden and higher operating expenditure from the stronger US$.
Opportunity to buy
The share price sell-off post-QZ8501 is a golden opportunity to accumulate the shares ahead of what is likely to be a very strong and impressive FY15 earnings performance. If the jet fuel price stays at a low of US$70-75/bbl into FY16, our target price may be revised up to RM6.
Source: CIMB Daybreak - 12 January 2015, Full PDF Report
Target RM3.50 (Stock Rating: ADD)
The unfortunate crash of QZ8501 on 28 December forces us to materially revise up Indonesia AirAsia’s losses but the benefits of the low oil price to AirAsia group are very significant and overwhelm all other concerns, including a stronger US$. Reiterate Add, with a higher target price based on CY16 sector average P/E of 11x, from 1.7x P/BV. Our core EPS forecasts are raised by 21-64% for FY15-16. Re-rating catalysts include the likely resolution of the Indonesian crisis and the earnings kick from very low oil prices.
Our core EPS forecasts are raised by 21-64% for FY15-16. Re-rating catalysts include the likely resolution of the Indonesian crisis and the earnings kick from very low oil prices.
Indonesia problems to clear
We believe that IAA will be able to resolve all regulatory issues regarding its flight schedules soon and will not be subject to major penalties, if at all. The clearest sign of this is the Minister of Transport’s statement last Friday that non-compliant carriers, including Garuda and Lion Air, may immediately reapply for approval to fly on any of the suspended routes, including IAA’s Surabaya-Singapore route. We also believe that IAA’s sales will not be affected by the accident for a lengthy duration because of the superb way in which management handled the crisis. The comments on Indonesian social media strongly support our assertion. In conclusion, the probability of IAA losing its operating licence, or of its insurers not paying compensation, or of major negative demand contagion to Malaysia and Thailand is very low.
Oil prices very beneficial
The fall in the jet fuel price has been sharp and more than offsets the strength of the US$. So, the overall benefit to AirAsia’s core earnings is significantly positive. Our jet fuel price assumption of US$90/bbl for FY15 (reduced from US$110) is still conservative against the spot price of less than US$70. A US$20/bbl drop in our jet fuel price assumption would lift core EPS by 60%. AirAsia is only 12% hedged for FY15 at US$115/bbl and so, it would benefit immensely from the low oil price. Most importantly, the savings from the cheaper oil is more than enough to offset the incrementally higher debt burden and higher operating expenditure from the stronger US$.
Opportunity to buy
The share price sell-off post-QZ8501 is a golden opportunity to accumulate the shares ahead of what is likely to be a very strong and impressive FY15 earnings performance. If the jet fuel price stays at a low of US$70-75/bbl into FY16, our target price may be revised up to RM6.
Source: CIMB Daybreak - 12 January 2015, Full PDF Report
