CIMB Research lowers AirAsia target price to RM2.55, Neutral

Published: Thursday November 21, 2013 MYT 8:35:00 AM 

Updated: Thursday November 21, 2013 MYT 8:38:01 AM

KUALA LUMPUR: CIMB Equities Research has lowered the target price of AirAsiafrom RM3.05 to RM2.55 and downgraded it from Outperform to Neutral.

“Given the level of competition in the marketplace, we had expected weak results butAirAsia’s 9M13 core net profit of RM376mil still fell below our expectations.

“Due to yield pressure, it accounted for just half of our previous full-year forecast against a more typical 55%-60%,” it said.

CIMB Research believes yield pressure will persist in 2014 as Malaysia Airlines (MAS) is intent on defending its market share.

“As such, we downgrade from Outperform to Neutral and cut FY13-15 core EPSestimates 16-20% for lower yields. Our target price is also reduced, still based on 11 times CY15 P/E, the sector average,” it said.

The research house expects only pedestrian group EPS growth in FY14 and FY15 as the Malaysia earnings fall, only to be offset by better associate earnings.

In its analysis, CIMB Research said AirAsia reported 3Q13 group core earnings of RM146mil, down 12% on-year. The key Malaysia earnings fell 22% on-year on the back of a 12.2% fall in base yield as competition hit hard, coupled with a 3.8% weakening of the ringgit, which lifted AirAsia‟s substantial US$ cost base.

The base yield decline in 3Q13 had accelerated from the 10.6% on-year fall for 2Q13. The weakness in Malaysia was augmented by the collapse in Indonesia’s bottomline as

yields also fell from competition and the rupiah depreciated.

However, the research house pointed out Japan’s losses have stopped and Thailand’s

profits grew healthily during 3Q13. The net effect was that the better on-year overall associate performance helped temper, but could not completely overcome, the pressure on Malaysia.

“AirAsia may suffer fare deflation for at least the next two years as the current heavy competition could prevent it from passing through to passengers the 9% rise in landing

charges from January 2014 onwards, the impending 9-11% rise in airport passenger service charges in February and the 6% GST from April 2015 onwards,” it said.