AirAsia’s share price slides 8.5%

KUALA LUMPUR: AirAsia Bhd's share price fell 8.5% or 25 sen yesterday to RM2.69 in its first day of trading following the disappearance of 49% associate Indonesia AirAsia's (IAA) Flight QZ5801, although analysts expect the incident to have no significant direct impact on the low-cost carrier's earnings.
The aircraft, an Airbus A320-200, with 162 people on board vanished during a flight from the Indonesian city of Surabaya to Singapore on Sunday. Search and rescue operations were expanded yesterday but there were still no signs of the plane.
AirAsia was the most actively traded counter on Bursa Malaysia yesterday with some 103 million shares changing hands. Its sister company AirAsia X Bhd (AAX) was also not spared the selldown, with its share price losing 5.5 sen or some 8% to close at 63 sen, with about 39 million shares traded, making it the fourth most actively traded stock yesterday.
Despite years of talk of listing IAA on the stock exchange, it remains an unlisted affiliate of AirAsia.
Analysts said the incident may impact AirAsia's near-term passenger growth, and earnings may come under pressure, but this would be mainly due to negative sentiment and not because of any change in the group's fundamentals, which remain intact with long-term potential growth prospects and low-cost competitive advantage.
HLIB Research said the incident is likely to have a deep impact on regional air travel sentiment, after two incidents involving Malaysia Airlines back in March (missing flight MH370) and August (flight MH17 shot down in Ukraine).
"Our expectation of potential air travel demand recovery in 2015 is now hampered by the latest air incident. We have now turned more cautious on the outlook of air travel demand, at least in the near term. Any meaningful rebound in air travel demand may only be realised in 2016," it said.
Similar to the MH370 incident, AirAsia Group's liability is likely to be fully covered by insurance and thus no direct impact on its finances is expected.
"However, we expect AirAsia Group (including AAX) to further cut its yields in 2015 in order to stimulate air travel demand, leveraging on the low jet fuel price."
HLIB Research cut its assumed yields for FY15 and FY16 by 5% and 1% respectively, to account for the weakening demand. As a result, FY15-16 forecast earnings have been cut by 17.6% and 3.8% respectively.
Affin Hwang Capital believes that while the tragedy is very unfortunate, any weakness in share price is opportunity to accumulate AirAsia stock.
It said the potential impact from the incident includes: a dent to the group's overall reputation and branding; persistent strong fare competition in order to encourage ticket sales; and further deterioration in the group's yield.
For now, Affin Hwang Capital said, IAA's contribution to AirAsia's earnings has been reduced to zero because the share of IAA's profit will only be recognised after AirAsia captures its share of IAA's losses that were not recognised previously. Hence, there will be no significant direct impact on AirAsia's earnings.
RHB Research Institute said risks to earnings arising from this incident are that this could cap the yield upside expectations.
"Although this will likely be more pronounced for IAA, we do not rule out that this could possibly impact yields for the whole AirAsia group, notably Malaysia's AirAsia (MAA)."
It said a 2.5% reduction from its base case on the underlying yields for FY15 would reduce FY15 earnings by 6%.
"But with yields already at rock bottom levels as a result of MAS' irrational pricing strategy, we estimate that MAA's downside in yields would not be hard hit. However, this unfortunate tragedy could mean the risk of higher losses for IAA."
RHB Research Institute forecasts RM30 million share of losses from IAA in FY15, from the total of RM100 million in losses expected in FY14. It maintains a buy call for the stock at a target price of RM3.47.
"With the stock widely held by institutional funds, we foresee any price weakness from this tragedy to follow through with a rebound."
Affin Hwang Capital and RHB Research Institute maintain their buy call and target price of RM3.25 and RM3.47 for AirAsia respectively, while HLIB Research cut it to a trading sell call with a target price of RM2.64.