Petaling Jaya (The Star/ANN) - Analysts say investors have ¿over-reacted¿ to the announcement of new entrant Malindo Airways which has caused AirAsia Bhd's share price to decline for the second consecutive day to a year-to-date low of 2.95 ringgit (US$0.96).
An analyst from Hong Leong Investment Bank said the stock price continued to fall on the formation of Malindo Airways which was perceived as a threat for AirAsia by some.
The stock, which closed at 3.19 ringgit on Tuesday, shed 17 sen to 3.02 ringgit on Wednesday and fell another 7 sen to 2.95 ringgit yesterday. The share had at 11:46am yesterday dropped to a bottom of 2.82 ringgit.
The analyst said that investors were over-reacting to the news as competition was inevitable in any industry.
¿There will definitely be a price war but the question is: how long can the new airline press its margins? It goes back to how well companies can control efficiencies and who has the strongest fleets,¿ he said.
He also said new airlines would have to survive the critical two-year period, citing an example of Firefly which lost 70 million ringgit in the first half when it started operations.
¿The same goes to AirAsia when it started its fledge in Thailand and Indonesia. It only recovered from losses after the first two years,¿ he said.
As for Malindo, its branding and marketing strategy would be vital for its success. After all, it was new in the market, he added.
On Australian-based low-cost carrier Jetstar's announcement to increase flights, he said: ¿Any airlines can increase flights. It is a matter of the demand. If the community's average wages improve, people can afford to fly. Hence, it makes sense for airlines to increase supply, that includes AirAsia.¿
It was reported that Jetstar would increase the frequency of Kuala Lumpur-Singapore trips and flights to other South-East Asia destinations at end-October.
At the moment, he maintained his financial year ending Dec 31, 2012 forecasts for AirAsia.
Another analyst concurred.
¿I think the drop in share price is an over-reaction. Malindo is a new start-up and there is a lot for it to resolve,¿ he said.
He also said that Jetstar's increased capacity did not pose much competition for AirAsia as it was still a foreign airline.
¿The reason why people are worried is because Malindo is a joint venture with a local company which can operate domestic flights,¿ he explained.
OSK Research analyst Ahmad Maghfur Usman said now was a good time to accumulate the shares following the negative reactions of some investors.
He said AirAsia's earnings improved this year despite increased competition in the sector.
¿Margins may be compromised due to competition but the growth in demand could absorb the thinning margins going forward,¿ he added.
He also said AirAsia's solid financial standing would give it an upper hand in facing the competition.
Meanwhile, CIMB Research has reduced the target price for the stock from 4 ringgit to 3.50 ringgit.
In a note to investors, it said: ¿We see increased risks for AirAsia as Malaysia is its most profitable base and the source of funds to support fledging overseas associates. As such, we cut our earnings per share (EPS) forecasts on lower yield assumptions, and reduce our target price (still pegged to nine times core price-to-earnings), but roll over to an end-2013 target.¿
According to the research house, 2013 EPS forecast was cut by 15.5 per cent, 2014 EPS forecast by 27.4 per cent on account of the greater competition from Malindo.