Aviation sector
Maintain underweight: The continued problems within the eurozone and the US suggest that 2012 will be another challenging but interesting year for the aviation sector. Entering into 2012, we take a cautious outlook. We anticipate a softer GDP growth of 4% for Malaysia from an estimated 4.8% in 2011. Against the current economic backdrop in Malaysia and the region, we expect demand for low-cost travel to outpace premium travel. Against a softening economic outlook, although demand for air travel will be negatively impacted, historical trends show that low-cost carriers will likely fare better than full service carriers due to their lean cost structure, competitive pricing and the switch to low-cost carriers even for business travel.
This year, all eyes will be on the launch of several new airlines — MAS’ premium airline, SIA’s budget airline Scoot, Qantas’ Asia-based premium airline RedQ, and Thai Airways’ low-cost airline Thai Smile. Both Scoot (a wholly-owned subsidary of SIA) and Thai Smile are expected to take off in 2H12. Scoot will be in direct competition with AirAsia X as it will focus on the budget segment of long-haul routes. Thai Smile will initially start with domestic routes, which are shorter than two hours, competing with AirAsia Thai.
The direction of oil the price will continue to be the biggest challenge for the aviation sector. Over the past one year, the crude oil price has remained elevated ranging between US$80 (RM248) to US$115 per barrel. Similarly, the price of jet fuel remained high, in the range of US$105 to US$141 per barrel (crack spread widened in 2011). Entering into 2012, we take the view that the crude oil price will soften slightly amid the global economic slowdown. We expect West Texas Intermediate (WTI) to average US$95 per barrel in 2012 (2011:US$100 per barrel).
AirAsia; maintain “add” with a target price of RM4.40: In FY12 we have modelled in 14% passenger growth, and 11% for FY13, still modest in our opinion, given that even during the 2008/09 financial crisis the number of passengers carried grew by 20% year-on-year.
We make no changes to our FY11 to FY13 earnings. In our Outlook 2012 strategy report in December 2011, we raised our target price on AirAsia Bhd to RM4.40 (from RM3.70 previously), as we tag the valuation at 14 times FY12 price-earnings ratio (PER), which is plus one standard deviation above its three-year average. Our “add” call on the stock is based on the imminent listings of its associates (Thai AirAsia and Indonesia AirAsia) coupled with the potential launch of AirAsia Japan in 2H12.
MAS; maintain “reduce” with a TP of RM1.20: MAS is embarking on a network rationalisation exercise to withdraw structurally weak, loss-making routes. We make no change to our earnings forecast. At this juncture, due to the financing risk for its capital expenditure, coupled with the tough environment, we keep our “reduce” recommendation on MAS with a target price of RM1.20 based on a price-to-book value multiple of 1.8 times. — Affin IB Research, Jan 19
This article appeared in The Edge Financial Daily, January 20, 2012.
Maintain underweight: The continued problems within the eurozone and the US suggest that 2012 will be another challenging but interesting year for the aviation sector. Entering into 2012, we take a cautious outlook. We anticipate a softer GDP growth of 4% for Malaysia from an estimated 4.8% in 2011. Against the current economic backdrop in Malaysia and the region, we expect demand for low-cost travel to outpace premium travel. Against a softening economic outlook, although demand for air travel will be negatively impacted, historical trends show that low-cost carriers will likely fare better than full service carriers due to their lean cost structure, competitive pricing and the switch to low-cost carriers even for business travel.
This year, all eyes will be on the launch of several new airlines — MAS’ premium airline, SIA’s budget airline Scoot, Qantas’ Asia-based premium airline RedQ, and Thai Airways’ low-cost airline Thai Smile. Both Scoot (a wholly-owned subsidary of SIA) and Thai Smile are expected to take off in 2H12. Scoot will be in direct competition with AirAsia X as it will focus on the budget segment of long-haul routes. Thai Smile will initially start with domestic routes, which are shorter than two hours, competing with AirAsia Thai.
The direction of oil the price will continue to be the biggest challenge for the aviation sector. Over the past one year, the crude oil price has remained elevated ranging between US$80 (RM248) to US$115 per barrel. Similarly, the price of jet fuel remained high, in the range of US$105 to US$141 per barrel (crack spread widened in 2011). Entering into 2012, we take the view that the crude oil price will soften slightly amid the global economic slowdown. We expect West Texas Intermediate (WTI) to average US$95 per barrel in 2012 (2011:US$100 per barrel).
AirAsia; maintain “add” with a target price of RM4.40: In FY12 we have modelled in 14% passenger growth, and 11% for FY13, still modest in our opinion, given that even during the 2008/09 financial crisis the number of passengers carried grew by 20% year-on-year.
We make no changes to our FY11 to FY13 earnings. In our Outlook 2012 strategy report in December 2011, we raised our target price on AirAsia Bhd to RM4.40 (from RM3.70 previously), as we tag the valuation at 14 times FY12 price-earnings ratio (PER), which is plus one standard deviation above its three-year average. Our “add” call on the stock is based on the imminent listings of its associates (Thai AirAsia and Indonesia AirAsia) coupled with the potential launch of AirAsia Japan in 2H12.
MAS; maintain “reduce” with a TP of RM1.20: MAS is embarking on a network rationalisation exercise to withdraw structurally weak, loss-making routes. We make no change to our earnings forecast. At this juncture, due to the financing risk for its capital expenditure, coupled with the tough environment, we keep our “reduce” recommendation on MAS with a target price of RM1.20 based on a price-to-book value multiple of 1.8 times. — Affin IB Research, Jan 19
This article appeared in The Edge Financial Daily, January 20, 2012.
