AirAsia (RM1.50; Buy; Price Target: RM1.95; AIRA MK) Signed an amendment agreement to defer taking delivery of 7 aircrafts in 2011

AirAsia announced that it has signed an amendment
agreement with Airbus SAS to defer taking delivery of 7
aircraft in 2011 to 2015 with no penalties payable.
According to the Group, the deferment is due to the
infrastructural constraint at the current LCCT which could
not accommodate the additional number of aircraft. The
new LCCT, which has a bigger capacity, is expected to be
completed only in 1Q12. Below is the revised aircraft
delivery schedule for AirAsia:
Revised aircraft delivery schedule
Year No. of aircraft
2010 16
2011 8
2012 24
2013 24
2014 24
2015 9
Source: Company, DBS Vickers Research
We are positive on AirAsia’s move to defer the delivery of its
aircraft as it will still have sufficient capacity to meet the
projected demand. The deferment will allow the Group to
maximize capacity with rising air travel demand, which
could increase load factor to 77-79% in FY11F-12F (from
current forecast of 74-75%), and potentially lift our
earnings forecasts by 18-21%. This is assuming 4 new
aircraft (out of the 8 aircraft to be delivered in FY11) would
be added to the Malaysian operations in FY11F (from
current forecast of 7) while Revenue Passenger Kilometres
(RPK) is unchanged.
We also understand that the deferment will result in a
minimal increase in aircraft prices. However, this should be
less of a concern considering that AirAsia had purchased its
aircraft well below the listed prices (at least c.30%
discount). The move may help to partly relieve the burden
on AirAsia’s balance sheet too where net gearing is
estimated to reduce to 2.1x by end-FY12F from our current
forecast of 2.5x.
We are maintaining our Buy call with RM1.95 TP based on
9x CY11F EPS. We think its current valuation is unjustified
with AirAsia being the largest low cost carrier in the region.
We believe that the market has underestimated AirAsia’s
growth potential in riding the sector recovery. Additionally,
AirAsia’s ability to fund new aircraft purchases and repay
loans should no longer be a major concern, as operating
cash flows should strengthen on stronger earnings ahead.