Relief for AirAsia’s balance sheet

KENANGA Research has reiterated its trading buy recommendation on AirAsia Bhd at RM1.22 with an unchanged target price of RM1.50, based on FY09 price-earnings ratio (PER) of nine times, noting that it was positive on the airline’s plans to defer the delivery of 15 planes. The deferment would give a breather to the low-cost carrier’s stretched balance sheet already with a net gearing of 3.7 times as of March 31, 2009, it said.

AirAsia plans to delay eight and seven aircraft out of the scheduled 24 and 23 A320 deliveries for 2010 and 2011 respectively. The 15 delayed planes will be delivered in 2014.

“While management confirmed that financing for 2010 and 2011 is in place and attributed the deferments to uncertainty in the new LCCT’s (low-cost carrier terminal) completion date, we are more inclined to think that the delays are related to its heavily geared balance sheet.

“Coupled with the proposed RM500 million placement, AirAsia’s FY10 net gearing is expected to be reduced to 2.6 times from our original forecast of 3.5 times,” said the research house.

Apart from the A320s deferments, AirAsia was also looking to dispose of three B737s it owned and retire another 13 leased B737s used by its associates in Thailand and Indonesia.

“This is not unexpected of as management has always reiterated that it intends to replace all the B737s with its new A320s which are more efficient. AirAsia, however, needs to find new lessors for the leased planes to avoid penalty from early return of leased planes.

“Though we believe that it could be challenging to entice buyers or lessors in the downturn, disposal of any B737 is positive as the group stands to save leasing, fuel and maintenance costs through deployment of new A320s,” it said.

As an example, the enlarged group could utilise AirAsia X’s plane for the KL-East Malaysia routes during the year-end super-peak period without having to seek shareholders’ approval for the related party transaction, it added. On the idea of merging AirAsia and AirAsiaX mooted by the company’s chief executive officer, Kenanga said this would enable synergies between the short- and long-haul operation.

“As most investors are less familiar to the long-haul business and could be resistant to the proposed merger, management has decided to aggressively promote AirAsia X to both local and foreign investors.

“Nonetheless, we understand that the merger is not likely to materialise in the near term and will largely depend on investors’ acceptance of AirAsia X,” it said.
Kenanga Research said AirAsia’s management believed that strong ancillary income is the best buffer against volatile price as opposed to hedging which could involve margin calls.

“The group recently launched Redbox — a low-cost courier service which offers up to 80% price discount compared to other conventional courier services.

“Other projects in the pipeline include online currency exchange; duty free online shoppings; AirAsia savers account which comes with free flight rewards ; and Red Megastore — a growing online shopping website which will expand its products range to include various gadgets such as handphones, digital cameras,” it noted.

Kenanga said the near-term outlook for AirAsia was stable, and there were still strong forward bookings with fewer last-minute ticket sales indicating that more travellers are booking in advance to enjoy cheaper fares. Mounting competition and heavy promotional activities should continue to weigh on yield but benefits load factor, it said.

“We are adjusting our FY09 and FY10 profit forecasts higher by 1.7% and 1.1% respectively after factoring for lower yield, better load factor and reduced financing cost from the plane delays.

“Investors’ sentiment we believe has turned more positive towards AirAsia following the deferment plan and proposed share placement,” it said.