AirAsia - Impressive 14x rise in net profit

The 14-fold rise in 2Q09 net profit is impressive considering this was achieved by cutting ticket prices by 19% to RM160 per pax and with no fuel hedging yield. This has paid off as EBIT margin rose to 33.6% vs 13.8% in 2Q09. This stands in stark contrast to SIA’s –2.5% in 1QFY10 and Cathay Pacific’s –11% for 1H09. In 1H09, pre-tax profit rose 313% to RM342.3m and net profit doubled to RM$342.3m. Out full-year estimate is now raised from RM639m to RM659m.

Limited runway capacity at LCCT. A main reason behind the delay in aircraft delivery was the shortage of parking slots. As at end-June, AirAsia is short of one slot. However, AirAsia indicated it will be offered 6-8 additional parking slots by 2010. It is also negotiating for lower handling charges with MAHB.

Associate and JV still at a loss. Both the Indonesian associate and Thai jv reported a combined loss of RM30m. Thus, there is a risk that the receivables amounting to RM890m could potentially be impaired. However, CEO Tony Fernandes indicated this should be gradually repaid over the next three years.

We raise our FY09 net profit estimate by 3% to take into account lower 1H09 costs and higher ancillary income. Our FY10 net profit number remains unchanged. Key risk is higher fuel prices and the potential impairment in receivables from its Thai jv and Indonesian associate which amount to about 30 sen/share.

Last week, we raised the stock to a BUY with a RM1.84 target price. Although we remain concerned about impairment charges, AirAsia has delivered stellar results, but trades at significant PE discount to full-service peers. While this could be due to potential impairment of its book value, we believe such a high discount is unwarranted.