RESEARCH houses are mixed on budget airline AirAsia Bhd.
RHB Research believes it is premature to turn positive on airlines, including AirAsia Bhd, given the weakening demand for air travel and “massive new capacity” coming onstream from full service and budget airlines in the region over the short term, intensifying competition and depressing yields.
In maintaining its underperform rating on AirAsia at a fair value of 67 sen, RHB noted that although the airline’s profit before tax of RM168.9 million for the financial year ended Dec 31 2008 had beat its forecast and that of the market, it was purely technical.
“This ‘strong’ performance is purely ‘technical’ as the massive unwinding of the out-of-money fuel hedges and interest rates during 4Q (of which losses were regarded as ‘exceptional’) means AirAsia could immediately in 4Q benefit from the much lower spot fuel prices and current interest rates,” RHB Research added.
It said that the airline’s clean up of its books could additionally put more strain on its already stretched balance sheet.
The research house raised Air-Asia’s FY09-10 net profit forecasts by 70% and 20% respectively to reflect a lower jet fuel price assumption of US$70 (RM259) a barrel from US$80 previously.
HLG Research, meanwhile, is recommending that investors avoid airlines due to contracting passenger demand, fuel cost volatility and an “aggressive” price war triggered by price competition. “Sector recovery will be protracted post any economic turnaround,” it said in a note to clients yesterday.
It highlighted the budget airline’s rising debt level to fund its new aircraft, estimating a FY09 net gearing level of 4.1 times, low core Ebit (earnings before interest and tax) ratio (an estimated 1.4 times in FY09) and negative free cash flow of 75 sen per share.
It added that AirAsia’s yields would be under pressure from aggressive seat sales to maintain its high load factor.
Additionally, the research house expected gestation period for profitability of new aircraft and new routes to be under pressure on slowing passenger travel.
“Their financial position no longer gives the luxury of 12 months gestation for new routes to be profitable which they currently enjoy.”
ECM Libra Investment Research however, had a more positive stance on the budget airline’s future, with a buy rating at 96.5 sen, pegging a target price of RM1.90 on the stock.
Despite the exceptional losses incurred in FY08, it expected the airline to capitalise on lower spot crude oil prices this year. Other airlines which have fuel hedges around US$100 billion would continue to see an earnings squeeze, it said.
“We understand from management that forward bookings are holding up well so far this year,” the research house said in a note yesterday.
It however, reduced its FY09 and FY10 earnings for AirAsia by 4.7% and 5.7% respectively to take into account the lower-than-expected aircraft net addition to the Malaysian operations.
AirAsia slipped 2.5 sen to close at 94 sen yesterday.
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