Air Asia

AirAsia Bhd (RM1.45| BUY| Technical Target:RM2.00)
Current RM1.40 share price base still a reasonable entry point for investors to ride the uptrend channel.

Business Prospects
Positive earnings outlook helped by deferral of aircraft delivery and lower gearing

• First half net profit of RM342m is 65% of full-year estimates. AirAsia is expected to bounced back from last year's loss of RM497m and deliver 22% ROE in FY09.
• Second half is expected to be challenging given intense competition and escalation of H1N1 outbreak. The company plans to counter this by actively managing its load factor (currently ~75%) and focusing on high-margin ancillary income. Furthermore, with two festive seasons (Hari Raya and Christmas/New Year) falling in the second half of the year this year shall be a boost for the load factor.
• AirAsia now obtains its fuel on the spot market and no longer uses any fuel hedging contracts. As such, a further rise in crude oil could pose a risk to earnings.  Crude oil has been steadily rising from this year's low of US$40 per barrel to the current US$70 level. .
• The company recently proposed a private placement of up to 418m new shares to expand its paid-up capital by up to 20%.  Based on a 10% discount to current share price, we estimate this would raise about RM616mil in cash and reduce its gearing from the current to 3.5x to about 3.1x.
• Deferral of  delivery for 8 aircraft from 2010 to 2014 would help the company to lower its  depreciation and finance charges, which shall be beneficial to near term earnings. The deferral shall also reduces concerns of AirAsia expanding too aggressively in a weak demand environment.

Technical Outlook
Share price building a nice solid base around RM1.40

• The stock is building a fairly solid base around RM1.40 level and buying interest remains fairly strong, despite the recent correction in the equities market.  Also, RSI has cooled down from an incredibly over-heated 96% to 50% currently.
• The uptrend channel remains intact, with next key resistances being RM1.65 and RM2.00 respectively
• Our RM2.00 technical target is 8.7x FY10E P/E, which is relatively undemanding compared to 4-year P/E average of 14.8x.
• We would consider the current price still viable for investors, given the positive momentum of the share price and positive business prospects for AirAsia.

Source/Reference
HLG