Air Asia

Air Asia Plc (AAV)

Investment thesis: We fundamentally like AAV for its strong earnings growth profile—a 31% CAGR during FY11-14 against 12% for SET. The current tourism low season may weaken sentiment toward the stock in the near-term, but we expect interest to rebuild in the approach to tourism high season, which starts in 4Q12.
AAV currently trades at an FY12 PER of 11x, a 4% discount to its peer average of 11.5x, and a YE12 EV/EBITDA of 4x, a 39% discount to its peer mean of 6.6x. We think the stock should trade at least on a par with its peers, given its stronger EBITDA and net profit growth. We have, therefore, initiated coverage on AAV with a BUY rating and a YE12 target price of Bt4.20.
Strong market and fleet expansion key growth drivers: Thai Air Asia (TAA) operates in the world’s fastest growing aviation markets—South Asia, China and Southeast Asia. Scoping down to Thailand, the air passenger traffic of low-cost carriers (LCCs) posted a 2009-11 CAGR of 31%. In addition, TAA plans to expand its fleet to 48 aircraft by 2016 from 24 currently. The strong market growth outlook and the planned fleet expansion are TAA’s key growth drivers.
Ancillary income to boost earnings: Apart from passenger revenues, which are expected to sustain growth, ancillary service income presents an earnings booster, as the marginal cost of offering such services is low. Ancillary service revenues are forecast to rise from 16% of total revenues in 2011 to 20% in 2014. In all, we expect AAV to post a strong FY11-14 profit CAGR of 31% from Bt1,014m to Bt2,295m.
Scope for profit upside from move to Don Mueang: TAA’s move to Don Mueang will boost its bottom-line, we believe. Firstly, it will pay lower landing & parking charges and rental fees. Our study indicates that AAV’s net profit will increase by 2-9% in FY12-14. Secondly, TAA should save on fuel costs in the range of 1-2% annually. As such, our sensitivity analysis suggests that AAV’s FY12-14 earnings could be 1-5% higher than our current forecasts. In addition, the firm should benefit from the recent jet oil price weakness. If the jet oil price were to remain at the current level through this year, our FY12 net profit forecast would increase by 25% from the current projection.