Airasia- poorer results, as expected

Results Update

For QE30/6/2011, Airasia's turnover increased by 3% q-o-q or 15% y-o-y to RM1.076 billion while its net profit dropped by 39% q-o-q or 48% y-o-y to RM104 million. Pre-tax profit declined 28.5% q-o-q but rose marginally by 0.6% y-o-y to RM145 million.


Table 1: Airasia's last 8 quarterly results

The drop in net profit on q-o-q basis is attributed to higher fuel costs; a drop in Other Incomes; a drop in Finance Income; and an increase in both Current & Deferred Tax. These exceed the drop in aircraft maintenance & finance cost.

The drop in net profit on y-o-y basis is attributed to increase in fuel costs, staff costs & depreciation charges; a drop in Finance Income; higher current tax; and a deferred tax charge [as compared to a credit in the same quarter last year]. These surpass the drop in aircraft maintenance & a decline in finance costs.


Table 2: Airasia's detailed P&L for q-o-q & y-o-y comparison

A look at Airasia's performance for the past 21-quarter results

Airasia's top-line has grown at a rapid pace for the past 21 quarters. Its bottom-line is generally rising but it dropped sharply in 2008, during the period of Global Financial Crisis. The sign of another sharp decline is now present again as the U.S. economy growth slowed & the European financial turmoil persists. From Chart 2 below, we can see that Airasia's pre-tax & net profit margin are again cutting below their respective 4-quarter MA line. The last time we saw something similar was just before the Global Financial Crisis.


Chart 1: Airasia's last 21 quarterly results



Chart 2: Airasia's profit margin for last 21 quarterly results

Valuation

Airasia (closed at RM3.62 yesterday) is now trading at a PE of 10.8 times (based on last 4 quarters' EPS of 33.4 sen). I would rate Airasia as fairly valued at the current PE multiple, given the uncertainty in the global economic outlook. Its strong growth & solid business model could command a PE of 10 to 15 times, depending market & economic outlook.

Technical Outlook

Airasia is now testing its 50-day SMA line at RM3.57. This & the psychological RM3.50 level will be the critical support level for this stock for the next few weeks. A break below this support could send the stock to the intermediate uptrend line support of RM3.15-3.20. The indicators have weakened, as reflected by the drop in MACD & RSI as well as the the decline in the ADX & the negative crossover of the -DMI & the +DMI.


Chart 3: Airasia's daily chart as at Aug 23, 2011 (Source: Quickcharts)

Conclusion

Based on the challenging business outlook & mildly negative technical outlook, I would rate Airasia a trading SELL if it breaks the RM3.50 support. Despite this rating, Airasia is a good long-term investment stock which deserves close tracking.