RHB Research upgrades AirAsia to Trading Buy, FV RM3.63

By Star Online: Business
12 September 2012

KUALA LUMPUR: RHB Research Institute has upgraded AirAsia to a Trading Buy from Market Perform and maintained its fair value for the low-cost carrier at RM3.63.

It said AirAsia's near-term earnings growth prospects are less exciting as growth from its domestic operation is tapering off, coming from an enlarged base.

RHB Research also said not helping either, are lingering losses from its new low-cost carrier start-up in Japan and the Expedia JV, given the long gestation periods for these new ventures.

“However, we believe value has emerged after the knee-jerk selldown on AirAsia following the recent uptick in crude oil prices as well as on the back of the latest news on Malindo Airways. Fair value is maintained at RM3.63 based on 12x FY12/13 EPS, in line with benchmark Ryanair's one-year forward target PER. Upgrade to Trading Buy from Market Perform,” it said.

The research house issued the report late Tuesday on news that Malindo Airways, a 51:49 JV between Subang-based National Aerospace & Defence Industries Sdn Bhd (Nadi) and Indonesia-based low-cost carrier Lion Air, is expected to take to the sky in May 2013.

It was reported that the new low-cost carrier start-up “may have about 100 planes within a decade” (Lion Air has had an outstanding order for 230 B737 aircraft) and it is “looking at selling tickets at AirAsia's pricing or lower”.

Malindo plans to offer flights within Malaysia and Indonesia, as well as to Thailand, China, India, Japan and Australia. Nadi is a privatised Bumiputera-controlled company (previously owned by Khazanah) engaged in maintenance, repair and overhaul of aircraft.

“We believe Malindo Airways is eyeing primarily AirAsia's lucrative domestic market in Malaysia. Theoretically, Malindo Airways, being a new entrant to the domestic market in Malaysia, will go all out for market share at the expense of profitability by undercutting prices.

“AirAsia, on the other hand, may also want nip the competition in the bud by dropping fares. This will result in a full-scale price war. However, practically, Malindo Airways' significance as a threat to AirAsia depends very much on how quickly and sizeable it can scale up its operations (that remain unclear at the moment). Over the longer term, its survival also depends on its ability to beat or at least match AirAsia's extremely low cost structure,” said RHB Research.

[Source]