RHB Research Institute has upgraded AirAsia Bhd to an Outperform from Trading Buy with a fair value of RM3.61.

It said on Thursday the low-cost carrier's nine-months core profit before tax (PBT) came in within its forecast but below market expectations.

For the nine-months ended Sept 30, 2012, earnings surged 256.5% to RM1.527bil from RM428.49mil in the previous corresponding period. Revenue increased by 11.5% to RM3.587bil from RM3.216bil.

RHB Research said AirAsia reiterated that low cost was its "key weapon".

It said that there was certain "over-reaction" by the market to the Malindo news, of which to a certain extent, has also been "blown out of proportion" by the media.

"While both low-cost air travel markets in Asia and Europe are bracing for more players and hence competition, Asia is still experiencing tremendous growth vis-vis Europe that is mature and saturated.

"For that reason, AirAsia believes that its overall yields and hence margins may not necessarily drop with the entrance of Malindo," it said.

The research house pointed out that AirAsia has just decided to deploy 10 new aircraft to Malaysia for FY12/13 vis-vis only five according to its original plan as it expects robust demand growth in Malaysia thanks largely to international traffic brought into Malaysia by AirAsia X.

"We are now beginning to find AirAsia's valuations fundamentally attractive. Upgrade to Outperform from Trading Buy. Fair value is RM3.61," it said.

To recap, AirAsia's net profit rose 3.6% to RM157.81mil from RM152.29mil a year ago. It posted a record revenue of RM1.24bil, up 14.4% from the RM1.081bil. Earnings per share were 5.70 sen compared with 5.50 sen.