A crowded airspace for aviation sector

TheEdge Wed, Mar 29, 2017 10:44am - 7 years View Original


This article first appeared in The Edge Financial Daily, on March 29, 2017.

 

Aviation sector
Maintain underweight:
Both AirAsia Bhd and AirAsia X Bhd posted record profitability in 2016, bolstered by declining fuel prices, robust passenger-demand growth and benign industry-capacity additions. Heading into 2017, we expect industry headwinds from heightened competition on the reinvigoration of Malaysia Airlines Bhd and aggressive expansion by Malindo Air to pressure industry yields, leading to revenue per available seat kilometre declines.

We expect AirAsia to weather the impending yield pressure with its cost-competitiveness superiority, underpinned by higher aircraft-utilisation hours and process digitalisation to protect yield spreads. The successful turnaround of the previously loss-making affiliates in Indonesia and the Philippines should stem the decline in Thailand, and provide bottom-line support amid intensifying competition in Malaysia. We also expect the upcoming sale of its leasing arm at US$1 billion (RM4.41 billion) to provide much-needed capital to pare down its borrowings and fund the 21-aircraft addition to its fleet in 2017. The potential listing of its Asean affiliates and holding companies on the Hong Kong Stock Exchange or New York Stock Exchange could crystallise the embedded value and rerate the share price. We raise our estimate by 25% for financial year 2017, primarily after lifting our earnings assumptions for its associates’ contributions. Our 12-month target price (TP) is now lifted to RM3.80, pegged at an unchanged 10 times calendar year 2017 estimated (CY17E) earnings per share (EPS). We upgrade to “buy”.

AirAsia X closed 2016 with an impressive turnaround and reported the first profitable year for the long-haul carrier after listing in 2013. We expect the earnings turnaround to be sustainable due to ongoing route optimisation and efficient capacity deployment. Despite mounting competition, AirAsia X remains dominant on many of its unique routes with superior pricing power.

We continue to favour AirAsia X for its turnaround story and continuous drive for cost optimisation. We maintain our “buy” rating with an unchanged 12-month TP of 57 sen, pegged at an unchanged eight times CY17E EPS.

With disappointing passenger growth for its Turkey operation on the horizon, Istanbul Sabiha Gokcen is not expected to break even at least until 2019, and this should continue to be a key drag on Malaysia Airports Holdings Bhd’s (MAHB) earnings. Despite the recent passenger service charge revision and concession-agreement extension, shareholder-return generation remains unappealing with less than a 5% return on equity and low 1% to 2% dividend yields. With declining unit revenue due to lower pax spend and escalating costs on incremental maintenance expenses at key airports in its stable, we continue to see pressure on earnings before interest, taxes, depreciation and amortisation (Ebitda) delivery. Our assumptions imply only a 2% Ebitda growth despite a 5% top-line increase. We maintain our contrarian “sell” call on MAHB, but we lift our 12-month discounted cash flow-derived TP to RM5.80 after lowering our capital expenditure assumptions. — Affin Hwang Capital, March 28

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