Aviation - overall - Capacity cuts still not happening
Recommendation: Neutral
OAG six-month forward schedules, as well as our checks and discussions with industry executives, strongly suggest that near-term capacity restructuring in Malaysia’s aviation industry will not happen as quickly as we had originally anticipated, despite the urgent tone in Khazanah’s recent document. The continuation of the low-yield environment and the delay in airlines’ capacity cuts will disadvantage AirAsia and AAX, but benefit MAHB. We retain our Neutral call for the sector. We currently have an Add call on AirAsia, but acknowledge that our target price of RM3.25 will need a longer time frame to realise. We have a Hold call on MAHB (target price of RM7.20), and a Reduce call on AAX (target price of RM0.72).
What Happened
We continue to check OAG’s forward airline schedules on a weekly basis to see if there are any signs of capacity rationalisation among the airline players in Malaysia, but am surprised to see none. The level of capacity deployment presently is unsustainable, as at least three of Malaysia’s four major airlines are not profitable. Despite the urgency in Khazanah’s August restructuring proposal, it appears that the process of moving on the various action points is administratively lengthy, and may be dependent on securing new leadership, among many other reasons.
What We Think
It looks more and more likely that industry capacity rationalisation, if it happens, will only take place towards the middle of 2015. The shape and form, and the extent of the rationalisation, is unknown at this point, and could be subject to many changes along the way. As a result, our yield assumptions for the airline sector in Malaysia, for 4Q14 and for 2015, may be subject to some downside. However, note that jet fuel prices have fallen from a 9M14 average of US$119/barrel to just US$100/barrel currently. Even accounting for extant fuel hedging during 4Q14, airlines will still benefit materially in 2015 if the jet fuel prices stay low. As such, airlines may still be able to deliver respectable earnings growth next year, even without industry-wide capacity adjustments.
What You Should Do
We believe that a sustained rerating of the airline stocks will need a ground-shift in the way that investors perceive the structural overcapacity that is plaguing the sector right now. Without this, airlines valuations could remain depressed, because investors are notably wary in placing their bets on the low oil price, given how volatile oil prices have been in the past. But although low oil prices cannot by itself rerate the airline space, it will definitely help to hold up the share prices, because of expected earnings improvements.
We have an Add call on AirAsia, but our target price of RM3.25 (20% premium to SOP) will probably take till end-2015 to materialise, from end-2014. AirAsia’s share price is at its approximate liquidation value, and there is strong downside protection even without industry rationalisation. We have a Hold call on MAHB, with a target of RM7.20 (DCF), and downside is also limited given that debt funding options for its Istanbul Sabiha Gokcen (ISG) purchase is available and will help reduce the size of the potential equity issue. We have a Reduce call on AAX, with a target price of RM0.72 (1.75x CY14 P/BV), as tough yield conditions on Australian routes could drag on for longer.
Source: CIMB Daybreak - 04 November 2014
Recommendation: Neutral
OAG six-month forward schedules, as well as our checks and discussions with industry executives, strongly suggest that near-term capacity restructuring in Malaysia’s aviation industry will not happen as quickly as we had originally anticipated, despite the urgent tone in Khazanah’s recent document. The continuation of the low-yield environment and the delay in airlines’ capacity cuts will disadvantage AirAsia and AAX, but benefit MAHB. We retain our Neutral call for the sector. We currently have an Add call on AirAsia, but acknowledge that our target price of RM3.25 will need a longer time frame to realise. We have a Hold call on MAHB (target price of RM7.20), and a Reduce call on AAX (target price of RM0.72).
What Happened
We continue to check OAG’s forward airline schedules on a weekly basis to see if there are any signs of capacity rationalisation among the airline players in Malaysia, but am surprised to see none. The level of capacity deployment presently is unsustainable, as at least three of Malaysia’s four major airlines are not profitable. Despite the urgency in Khazanah’s August restructuring proposal, it appears that the process of moving on the various action points is administratively lengthy, and may be dependent on securing new leadership, among many other reasons.
What We Think
It looks more and more likely that industry capacity rationalisation, if it happens, will only take place towards the middle of 2015. The shape and form, and the extent of the rationalisation, is unknown at this point, and could be subject to many changes along the way. As a result, our yield assumptions for the airline sector in Malaysia, for 4Q14 and for 2015, may be subject to some downside. However, note that jet fuel prices have fallen from a 9M14 average of US$119/barrel to just US$100/barrel currently. Even accounting for extant fuel hedging during 4Q14, airlines will still benefit materially in 2015 if the jet fuel prices stay low. As such, airlines may still be able to deliver respectable earnings growth next year, even without industry-wide capacity adjustments.
What You Should Do
We believe that a sustained rerating of the airline stocks will need a ground-shift in the way that investors perceive the structural overcapacity that is plaguing the sector right now. Without this, airlines valuations could remain depressed, because investors are notably wary in placing their bets on the low oil price, given how volatile oil prices have been in the past. But although low oil prices cannot by itself rerate the airline space, it will definitely help to hold up the share prices, because of expected earnings improvements.
We have an Add call on AirAsia, but our target price of RM3.25 (20% premium to SOP) will probably take till end-2015 to materialise, from end-2014. AirAsia’s share price is at its approximate liquidation value, and there is strong downside protection even without industry rationalisation. We have a Hold call on MAHB, with a target of RM7.20 (DCF), and downside is also limited given that debt funding options for its Istanbul Sabiha Gokcen (ISG) purchase is available and will help reduce the size of the potential equity issue. We have a Reduce call on AAX, with a target price of RM0.72 (1.75x CY14 P/BV), as tough yield conditions on Australian routes could drag on for longer.
Source: CIMB Daybreak - 04 November 2014
