AirAsia expected to deliver strong fourth quarter earnings

PETALING JAYA: After posting a 42.9% increase in net profit in the third quarter ended Sept 30, AirAsia Bhd is expected to deliver strong profitability in the fourth quarter of financial year 2017, says CIMB Equities Research.

According to the research house, while some investors are worried that the group’s plans to take delivery of 12 planes in the fourth quarter of financial year 2017 (4Q17) alone is too fast a pace of expansion, any negative yield impact will most probably be felt from 1Q18 onwards.

“Although oil prices have increased, AirAsia is 79% hedged for 4Q17 at US$61 per barrel (bbl) of jet. Besides, the US dollar has depreciated against the ringgit in recent months, and will help offset most of the impact from more expensive fuel in 4Q17.”

CIMB Research said the US dollar has depreciated against the ringgit in recent months, and will help offset most of the impact from more expensive fuel in 4Q17.

AirAsia reported a 42.9% increase in net profit to RM505.32mil in 3Q17 due to share of results from associates and lower deferred tax expenses.

It said earnings had increased from the RM353.89mil a year ago, while revenue rose by 45.1% to RM2.44bil from RM1.68bil.

However, for the nine months, its net profit fell 19.4% to RM1.26bil from RM1.57bil in the previous corresponding period. Revenue rose by 41% to RM7.05bil from RM5bil for that period.

The research house said that in addition to the 12 plane deliveries in 4Q17, AirAsia group is also planning to increase by up to 36 new planes in financial year 2018 (FY18), the most rapid growth in many years.

“With FY18 available seat km growth forecast to be in the midteens, we are consequently expecting base yields to decline around 7% year-on-year (y-o-y),” it said.

CIMB Research expects spot jet fuel prices to average US$70/bbl next year, from US$65/bbl this year, while AirAsia’s fuel hedge cover is less than 8% for FY18, from 77% this year.

“Hence, we forecast FY18 core net profit to fall 17% y-o-y. However, with strong demand and loads in Indonesia AirAsia and AirAsia Philippines as well as rising average fares, AirAsia is making a strategic move to expand when times are good.

“As such, we believe investors should look past an expected decline in FY18 profits, and over to FY19, when AirAsia is expected to reap the fruits of its capacity investments in FY18.

“Over the next 12 months, an expected special dividend of up to RM1.14/share will keep investors interested in AirAsia,” said CIMB Research, which has raised the stock’s target price from RM3.67 to RM4.04.

Shares in AirAsia Bhd traded 3 sen lower to RM3.14 with 14,15 million shares exchanging hands.