AirAsia (AIRA:MK) Fair Value: M$4.70
28 February 2018, Asia – AirAsia (AIRA:MK)’s share price suffered a 5% correction today following its 4Q17 financial results release and management briefing last night. We believe this is overdone as AirAsia’s 4Q17 results beat our forecasts, its long-term outlook is benign and current valuations are undemanding. Moreover, AirAsia is making marked progress in its digitalization efforts. Based on our estimates, AirAsia can potentially boost its net profit by M$574m million per year if it can successfully collect and monetize its Big Data. Valuing AirAsia at 20x P/E would imply a fair value of M$13 per share, three times its current share price!
CURRENT VALUATIONS ARE UNDEMANDING
AirAsia (AIRA:MK) is trading at 9x P/E, a 35% discount to its historical average P/E valuation since listing even though its 4Q17 net profit margin was on par with its historical average level. AirAsia’s 2.2x P/B valuation, a 15% premium to its historical average P/B valuation, can be justified by its 25% ROE in 2017 which surpassed its historical average ROE of 17%.
Chart: AirAsia P/E Valuation Range (2006 to 2018)
Chart: AirAsia quarterly net profit margin % (2004 to 2017)
Chart: AirAsia Price/Book Valuation Range (2006 to 2018)
Chart: AirAsia Return on Equity % (2006 to 2018)
SUCCESSFUL PASSENGER DATA MONETIZATION CAN POTENTIALLY BOOST AIRASIA’S NET PROFIT BY M$574 MILLION PER YEAR AND RAISE ITS FAIR VALUE TO M$13 PER SHARE
AirAsia is one of the most progressive airlines in Asia that is making headway in digitalization. During the 4Q17 results briefing, management shared that the number of unique users on AirAsia’s mobile app and website has risen 62% y/y and 11% y/y to 108m and 323m respectively in 2017.
AirAsia is partnering with Google to implement data collection and visualization, consumer analytics, cloud warehousing and machine learning to gain real-time insights, enhance operating efficiency and increase its Passenger data monetization prospects. AirAsia is also partnering Palantir to improve materials and rotables forecasts and reap cost savings through predictive maintenance.
Recall in our previous report, we estimate that the collection and monetization of Inflight Passenger Data is worth US$100 billion additional revenue per year for the global airline industry, a number that will dramatically increase with advances in Internet of Things (IoT) technology. This could potentially boost the global airlines’ enterprise value by at least US$120 billion (based on the airlines’ current valuations) to as much as US$500 billion. See our previous 5th Dec 2017 report:
AirAsia can potentially raise its revenue by M$1.6B per year, boosting its net profit by M$574m million per year (versus its net profit of M$1.64B in 2017), if it can successfully collect and monetize its Big Data based on our estimates. This will enable AirAsia to achieve M$2.2B net profit a year which would be a significant positive share price driver for AirAsia.
Investors will begin to value AirAsia like a growth stock given its improved long-term revenue and earnings growth prospects. Valuing AirAsia at 20x P/E would imply a fair value of M$13 per share. This is three times AirAsia’s current share price of M$4.22!
Chart: Airlines are sitting on US$100 Billion Inflight Big Data Goldmine
TARGETS TO BOOST ANCILLARY REVENUE TO M$55 PER PASSENGER IN 2018
AirAsia’s ancillary income rose 6% y/y to M$49 per passenger in 2017, mainly driven by the 21%, 15% and 42% y/y growth in baggage fees, cargo and fly-thru revenue. Ancillary revenue contributed 20% of AirAsia’s total revenue in 2017. Management targets to raise ancillary income to M$55 per passenger in 2018, with incremental growth coming from Online365, BigPay and Santan.
Chart: AirAsia – Target ancillary income contribution (2018)
MAIN NEGATIVE EARNINGS DRIVER IN 2018 IS FUEL GIVEN AIRASIA’S LOWER FUEL HEDGING LEVEL THIS YEAR
AirAsia has hedged only 13% of its 1H2018 fuel consumption so far at US$62.50/bbl (jet kerosene price) and will therefore be more significantly impacted by the higher fuel prices this year compared to last year. Year-to-date jet fuel prices are 22% higher compared to 2017 average levels. The 9% appreciation in the Malaysian ringgit against the US dollar helps to partially offset this negative impact. As such, AirAsia’s net average fuel price paid will be 10% higher in 2018 compared to a year ago based on our estimates.
DOMESTIC MARKET SHARE ROSE IN MALAYSIA, THAILAND, PHILIPPINES AND INDIA
AirAsia’s market share on domestic routes increased in Malaysia, Thailand, Philippines and India. Specifically, AirAsia Malaysia’s domestic market share rose from 46.6% in 4Q16 to 54.6% in 4Q17 while competitors Malaysia Airlines and Malindo’s domestic market share fell 7ppts and 2ppts y/y respectively. Elsewhere, Thai AirAsia’s domestic market share rose from 28.8% to 31.5%; Philippines AirAsia’s domestic market share rose from 13.4% to 18.3%; AirAsia India’s domestic market share rose from 3.2% to 4.8% in 4Q17.
GROUP FLEET EXPANSION WILL ACCELERATE THIS YEAR WHICH COULD PUT PRESSURE ON AIRASIA INDONESIA AND PHILIPPINES AIRASIA’S AVERAGE FARES
AirAsia Group plans to increase its fleet size by 30 aircraft on a net basis in 2018. This will raise its fleet capacity by 15% y/y to 226 aircraft by the end of 2018, ahead of its 14% net fleet capacity growth in 2017.
We are concerned about the marked increase in fleet capacity for Philippines AirAsia (+35%) and AirAsia Indonesia (+13%) which could put pressure on these carriers’ average fares in 2018. Management targets the IPO of Philippines AirAsia by end 2018.
Chart: AirAsia Group Net Fleet Capacity Growth (2018 versus 2017)
AIRASIA INDIA SURPRISES WITH NET PROFIT IN 4Q17 AND COULD POTENTIALLY BE WORTH US$408 MILLION UPON LISTING
AirAsia India delivered a small net profit of INR132m in 4Q17 (versus net loss of INR153m in 4Q16) notwithstanding its aggressive capacity growth of 80% y/y during the quarter, ahead of our expectations. AirAsia India plans to grow its fleet to 21 aircraft by the end of 2018 from 14 currently which will enable it to launch international services.
Management targets to list AirAsia India but we think this will only materialize in the next few years. Based on our preliminary estimates, AirAsia India could potentially be worth US$408m upon listing. This will boost the value of AirAsia Berhad (AIRA:MK), which owns a 49% stake in AirAsia India, by US$200m or M$0.24 per share, equivalent to 6% of AirAsia Berhad’s current market capitalisation. See our previous report below:
Note: Stocks with upside of more than 10% based on our fair value are assigned an Outperform rating. Stocks with downside of more than 10% based on our fair value are assigned an Underperform rating. Stocks with upside or downside of less than 10% based on our fair value are assigned an In-line rating. These are Crucial Perspective’s proprietary rating classifications and by no means serve as investment recommendations.
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