AirAsia’s fuel cost savings to be more apparent in FY15F
KUCHING: Analysts believe that AirAsia Bhd’s (AirAsia) fuel cost savings will be more apparent in the financial year 2015 forecast (FY15F).
According to AllianceDBS Research Sdn Bhd (AllianceDBS Research), investors were generally disappointed with AirAsia’s 4Q14 results, as fuel cost savings were not apparent in the quarter, given that it was -4 per cent year on year (y-o-y).
However, the research house noted that this was due to previous fuel hedges that were made at a higher price at US$115 per barrel (bbl) and the stronger US dollar.
AllianceDBS Research expects fuel cost savings to be more apparent starting the first quarter of 2015 (1Q15), given the cheaper average hedged cost of US$ 98 per bbl.
The research house believes investors will re-focus on this theme, once they begin to see the earnings impact from the cheap fuel in 1Q15.
Meanwhile, AirAsia is cashing out non- core assets, with AllianceDBS Research noting that the recent divestment of a 25 per cent stake in AAE Travel was a pleasant surprise, as the US$86.25 million price tag beat market expectations.
Next, it said that the group plans to sell a stake in its leasing arm (AAC) to strategic investors, in order to realise the value from its fleet of aircraft.
We think AAC could fetch a valuation of US$300 million, assuming only 45 aircraft are injected into it.
AllianceDBS Research
“We think AAC could fetch a valuation of US$300 million, assuming only 45 aircraft are injected into it,” the research house said.
While these concerns are valid, the research house thinks the market may have overly punished the stock, as AirAsia’s valuation remains decent at 7.1-fold FY15F PE.
On financial forecasts, AllianceDBS Research has cut its FY15/16/17F earnings forecasts by 10 per cent/21 per cent/22 per cent, to reflect the weaker RM and lower earnings of Thai AirAsia (TAA), which is the key reason behind the steeper earnings cut in FY16/17F.
The research house has revised its sum of parts-valuation (SOPvaluation) following the earnings cut, and its segregation of Malaysia AirAsia (MAA) into airline and aircraft leasing operations.
“Instead of valuing MAA as a single unit, we are valuing the airline and aircraft leasing operations separately, to better reflect the fundamental differences between these two segments,” it said.
Also, the research house imputed the amounts due from associates and joint ventures (JVs) in its computation of the SOP, to reflect the debt investments in these units (as the lender).
AllianceDBS Research’s SOP valuation for AirAsia is RM3.98 per share, but it applied a 45 per cent discount to the SOP value, in order to arrive at its target price of RM2.60 per share.
In light of the operating challenges surrounding Indonesia AirAsia (IAA), the research house believes such a steep discount is necessary in order to have a sufficient margin of safety.
It noted that the RM1.38 SOP discount is sufficient to account for a complete write-off of the amounts due from associates, complete write- off of IAA and 32 per cent impairment to the aircraft leasing segment (i.e. 24 aircraft on lease to IAA from the total fleet of 75 aircraft).
AllianceDBS Research is upgrading its rating on AirAsia to ‘buy’, given the implied potential upside to its target price of RM2.60 per share (+19 per cent).
“We believe the recent selldown has been overdone, and the market has ignored the significant value of its portfolio comprising non- airline businesses within the group,” the research house said.