AirAsia BUY Target Price RM3.80 by HLIB

Maintain buy at RM2.87 with an upward revision of target price to RM3.80 from RM3.50: We revise up FY11 earnings by 9.7% after imputing higher passenger load factor, fares, and ancillary income as well as the implementation of a fuel surcharge to offset higher jet fuel prices. We have also increased our FY12/13 earnings forecast by 15% to 20%.

We also upgrade our target price for AirAsia to RM3.80 from RM3.50 per share previously after estimating higher net income for FY11/13. We use the sum-of-parts valuation method to better reflect AirAsia's valuation post listing of AirAsia X, Thai AirAsia and Indonesia AirAsia, and re-rating catalysts from the planned listing.

AirAsia has re-introduced a fuel surcharge for bookings from yesterday due to escalating jet fuel costs which have touched some US$140 (RM415.80) a barrel. To recap, AirAsia abolished its fuel surcharge on Nov 11, 2008, when jet fuel prices dropped to US$80 a barrel. The fuel surcharge will vary between RM10 and RM30, depending on the flight hours.

With this exercise, overall demand for AirAsia flights may be affected, as consumers may switch to competitors. However, we opine that the fuel surcharge is minimal as AirAsia's'' total fare is still one of the lowest and the airline will be able to sustain its market share due to its strong brand name, connectivity, frequency, and the continued strong growth of regional air travel.

The appreciation of the ringgit against the greenback has been providing some cushion against the impact of escalating jet fuel costs, as the fuel is denominated in US dollars.

On April 27 this year, AirAsia announced its maiden gross dividend payout of three sen a share, translating into a net dividend payout of 2.77 sen a share (0.97% net dividend yield). This was in line with our expectations of a possible low dividend payout. Nevertheless, we are positive on the move as it will widen the stock's appeal to investors who are looking for dividend yields (especially pension funds), apart from capital gains. ' Hong Leong Investment Bank.