AirAsia : The Anti-Oil Trade

Declining oil prices amidst news flows of CFTC’ clampdown on excessive
commodity speculation may be positive for the valuations of airline stocks, especially those which are paying spot prices for fuel and have not hedged their fuel requirements like AirAsia.

CFTC’s clampdown on speculation drives oil prices down in near term
The Commodities Futures Trading Commission (CFTC) is now taking a hard line stance against excessive speculation in the commodities markets that has driven oil prices to above $140 last year. Among the measures proposed by the CFTC chairman Gary Gensler is imposing “position limits” on oil traders.

As a result, oil prices has dipped as much as 16% from a recent peak of
US$71.49 to last Friday’s US$59.89. The dip in oil prices will likely continue in the near term as the CFTC is now on a fastrack schedule to impose the measures as soon as possible. Bart Chilton, a CFTC commissioner, said that he expects the proposals for reform to be issued in September and to be implemented by October or November.

Downward pressure on oil prices positive for Air Asia
For a long time now, investor concern about high oil prices has been a drag-down on the share price of AirAsia as 42%-47% of AirAsia’s operating expenditure is spent on fuel.
As the CFTC plans to implement the reform measures by October-November, oil prices may face downward pressure for the next 3-4 months. An extended near term phase of suppressed oil prices will be positive for AirAsia which may draw some short term buying trading interest, particularly at a time when AirAsia’s share price valuation is considered cheap.

Trading and 12-month upside for AirAsia
It should be noted that AirAsia is currently trading at low P/E valuations of 4.6x which is very near its all time historical low P/E valuations of 3.7x. Looking at the past, AirAsia used to trade at much higher valuations of above 20x and even 30x (consensus valuations) when oil prices was beneath US$80 in 2006-2007.
As such, with oil prices near US$60/barrel and facing sustained downward pressure by CFTC’s speculation clampdown, and with AirAsia trading at relatively low P/E ratios of 4.6x, we see minimal downside for AirAsia. In addition, with AirAsia’s prices already stabilizing and creating a technical base at the RM1.10 support level, we opine that AirAsia is
technically ready (strong base building at RM1.10 support) to fulfill its near term trading upside potential at the RM1.50 level.

We peg a short term trading upside target of RM1.50 which is 6x our current year’s EPS projections of 25.2 sen. Looking from a longer term perspective, our house also has a 12-month target price of RM1.90 for AirAsia. We advise retailers to accumulate AirAsia at current price levels for a short term trade towards a near term trading upside price target of
RM1.50 within the next 1-3 months.