AirAsia on track with turnaround plans

AirAsia group is on track with its turnaround plans and fund raising exercise for both Indonesia and Philippines units, according to Public Invest Research.

It said on Friday yield is expected to improve towards the end of the year and the low-cost carrier is positive on 2H performance due to seasonally stronger quarters and capacity reduction by Malaysia Airlines.

“We reiterate our Outperform recommendation and price-to-earnings based target price of RM1.88, pegged to 10 times FY16F EPS (20%-discount).

“Our target price implies 98.1% potential upside from current level,” it said.

At current share price, AirAsia is trading at 2016F price-to-book value of 0.46 times and at a compelling PE ratio of 4.0 times, which is at its lowest four-year historical PER.

“We believe in AirAsia’s future performance based on positive fare trend, strong growth in ancillary income, lower fuel prices and strong brand name within Southeast Asian market,” said the research house.

To recap, Public Invest Research met the investor relations team of AirAsia for updates on its operation and outlook in 2HFY15.

Indonesia AirAsia (IAA) is considering the option of issuing non-voting reedemable and convertible preference shares (RCPS) to deal with its negative equity position with the conversion of part of its receivables.

“Nevertheless, the discussions with the existing shareholders is still ongoing, and expected to complete by end of this month.

“Meanwhile, its initial plan to issue new convertible bond of US$150mil is on track and expected to complete by end of FY15,” it said.

Public Invest Research also  said  Philippines AirAsia’s (PAA) board on July has approved for a new equity injection of 5bil pesos (US$110mil) and also agreed on the plans on issuing new convertible bonds, which the term sheets is currently being drafted.

Indonesia will be removing at least four to five aircraft from Jakarta, Bandung, Denpasar and Medan starting August to improve its aircraft utilisation.

To deal with Indonesia’s floor price ruling, IAA targeted to shift c.65% of its capacity to international routes, which have a higher margin than domestic routes.

It will also terminate its unprofitable routes such as Jakarta-Medan and Denpasar Bali-Solo, to minimise its losses.

Philippines will be selling two of its older aircraft in Zest and in discussion for an early return of at least two older lease aircraft to third party lessors by the end-2015.

To further improve its profitability, PAA is expected to reduce its capacity primarily from Cebu hub and redeploy it to China routes, which have a higher yield market.