Despite political error, AirAsia stock to outperform and benefit from digitalization, HSR delay, AirAsia China JV

AirAsia (AAGB:MK) Fair Value: M$4.70
AirAsia (AAGB:MK) Rating: Outperform

15 May 2018, Malaysia– AirAsia’s stock has been on a rollercoaster for the last few months and the past week saw AirAsia Group CEO, Tony Fernandes coming under heavy criticism for publicly supporting ousted Malaysia leader Najip Razak during the elections. AirAsia’s stock has fallen 8% in the past two days with an average of 44 million shares traded per day, five times the average daily volume of shares traded in the past year. As with all elections, emotions run high but AirAsia’s strong fundamentals remain intact and normalcy will prevail as Malaysians return to everyday life albeit under the new Pakatan Harapan (PH) government. We believe that AirAsia (AAGB:MK) is oversold and reiterate our Outperform rating as well as Fair value of M$4.70 for AirAsia (AAGB:MK) especially in view of its digitalization efforts, AirAsia China JV and benefits reaped from the delay and possible cancellation of the KL-SG High Speed Rail (HSR) project.

 

Fame is a double-edged sword

There are several different theories as to why AirAsia CEO Tony Fernandes ended up publicly supporting ousted Malaysia leader Najip Razak. It remains to be seen whether Tony Fernandes will be vindicated. AirAsia Group and its CEO has had a symbiotic relationship from the start, literally leveraging on each other’s fame. It has been mutually beneficial for the most part but in cases like this, the negative publicity is multiplied.

As per our comments in a Reuters article, we don’t foresee any lasting brand damage to AirAsia because there are simply too many BN-linked companies and consumers have long understood that businesses need political affiliations in Malaysia.

 

New Pakatan Harapan (PH) government is keen to establish pro-business credentials

Malaysia Prime Minister Mahathir Mohamad is better known for his acerbic wit but pragmatism has long been his trademark qualityand the new PH government has made it clear that they are pro-business especially with the setting up of the “Council of Eminent Persons” headed by the highly respected former finance minister Tun Daim Zainuddin.

It is highly unlikely that the new PH government will waste their credibility and political capital by seeking revenge against the many companies linked to Barisan Nasional. Going after an iconic company like AirAsia because of its CEO, will appear petty and be most counterproductive.

 

KL-SG High Speed Rail (HSR) project will be delayed and possibly cancelled amidst further feasibility reviews

Malaysia Prime Minister Mahathir Mohamad has long expressed reservations about the cost and feasibility of the KL-SG HSR project. Further feasibility reviews and accompanying delays are almost certain and it is unknown how the Singapore government will react.

Delays in the KL-SG HSR will be beneficial to AirAsia.The Kuala Lumpur-Singapore air route is the busiest international city pair in the world in terms of flight frequencies and AirAsia is the dominant carrier on this route with 25% market share. The Kuala Lumpur-Singapore route contributes 3% of its revenue and is considered as a high profit margin flight sector. The KL-SG HSR would also have resulted in cutbacks on the Kuala Lumpur-Singapore route which feeds connecting traffic into AirAsia’s hub at Kuala Lumpur.

Chart: Airline market share on Kuala Lumpur-Singapore route (2018)

Chart: Airline market share on Kuala Lumpur-Singapore route (2018)

AirAsia’s valuations are at significant discount to sector peers even on our more conservative earnings estimates despite its superior profitability 

AirAsia’s recent share price correction looks overdone. AirAsia is trading at only 9x 2018E P/E even on our more conservative earnings forecasts (which factor in US$90/bbl jet fuel price for the rest of this year)– a 47% discount to the Asia Pacific airline sector average valuation of 17x 2018E P/E even though it is one of the most profitable carriers in the region and globally.

Chart: AirAsia’s P/E valuation versus Asia Pacific airline sector average P/E (2018E)

Chart: AirAsia’s P/E valuation versus Asia Pacific airline sector average P/E (2018E)

 

New PH government is likely to further enhance China ties which bodes well for AirAsia China JV

The richest person in Malaysia, billionaire Robert Kuok’s position within the PH government Council of Eminent Person is highly significant as he is regarded as the Malaysian with the best connections in China, having had private meetings with every Chinese top leader from paramount leader Deng Xiaoping to President Xi Jinping.

Despite his advanced age of 94 years and rumoured poor health, Robert Kuok’s willingness to participate in the PH government means Prime Minister Mahathir is serious about further enhancing ties with China which bodes well for AirAsia China JV.

See our previous reports:

AirAsia (China) adds partners but lack of Henan govt stake raises risk of other entrants

Zhengzhou Airport flying high with Henan Cargo Airlines, Cargolux/Emirates partnership and AirAsia China JV

 

AirAsia Digitalization

See our previous reports:

More upside as AirAsia (AIRA:MK) pursues Big Data monetization

Airlines are sitting on US$100 Billion Inflight Big Data goldmine

BigPay, Grab Financial just the start of Transport’s jump onto Fintech bonanza in Asia

 

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.

 

Independent Research Declaration: Crucial Perspective does not own any position in the equities featured in this report nor have we received any compensation for writing this report. 

 

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Key Takeaways from AirAsia (AIRA:MK) Investor Day 2017

 

AirAsia (China) adds partners but lack of Henan govt stake raises risk of other entrants

 

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More upside as AirAsia (AIRA:MK) pursues Big Data monetization

 

BigPay, Grab Financial just the start of Transport’s jump onto Fintech bonanza in Asia

 

Airlines are sitting on US$100 Billion Inflight Big Data goldmine

 

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