Review

• Excluding exceptional items such as remeasurement gain of RM1.4bn, unrealised foreign exchange loss of RM309mn and other exceptional items, Capital A’s FY23 core losses of RM163.5mn came in higher than our expectation of RM35.3mn loss but lower than consensus estimates of RM352.6mn loss. The variance was largely due to higher-than-expected depreciation and maintenance costs.

• The group’s 4Q23 demand (RPK) contracted by 2% QoQ while capacity (ASK) was flat. This decline was due to weakness in Malaysia AirAsia (MAA) and Indonesia AirAsia (IAA), partially mitigated by Thai AirAsia and Philippines AirAsia (Figure 1 - 4). Load factor remained strong at above 80% for all operating units in 4Q23.

• In terms of yield, the QoQ increase in RASK (Revenue/ASK) of 15.6% outpaced the QoQ growth in CASK (Cost/ASK) of 4.1% caused by higher staff cost, fuel and maintenance expenses. However, the group continued to register negative spread (i.e. 0.99sen/ASK in 4Q23), indicating the airlines were still operated at sub-optimal levels. Note that the group only operated 164 aircraft in 4Q23 out of its total fleet size of 212.

• The non-aviation segment reported higher revenue of RM653.7mn (+0.6% QoQ, +67.4% YoY) and turnaround of EBITDA to RM74.7mn in 4Q23 (vs RM97.8mn loss in 4Q22). The recovery was led by all segments especially the aviation service segment (ADE), which registered record quarterly revenue and EBITDA of RM168.2mn (+2.2% QoQ, +125.4% YoY) and RM47.5mn (+10.9% QoQ, +783% YoY) respectively, thanks to pent-up demand for MRO services (see Figure 5 & 6).

• All in, Capital A achieved its fifth consecutive quarter of positive EBITDA at RM218.6mn (adjusted for EI) in 4Q23. The total cash increased to RM703mn with strong cash flow from operation of RM1.0bn. As at Dec-23, Capital A’s deficit in shareholders’ funds increased further to RM8.7bn from RM8.43bn in the preceding quarter.

Impact

• No change to our FY24-25 earnings projections.

Outlook

• Management is tight-lipped about the disposal of aviation business to AAX, especially on the share entitlement ratio, which would depend on valuations of Capital A’s aviation business and new AAX shares. However, management is hopeful that the sale and purchase agreement with AAX can be signed this month. Note that based on the non-binding offer letter, Capital A has proposed to dispose AirAsia Berhad and AirAsia Aviation Group Limited and the disposal consideration is expected to be satisfied by AAX via cash and/or issuance of new AAX shares.

• With regards to the SPAC, we view the proposals, i.e.: 1) brand disposal, 2) merger with Aetherium Acquisition Corp (GMFI), distribution of consideration SPAC shares, as a big step forward to uplift Capital A from its PN17 status. However, the completion is subject to some risks of nonapproval from the authorities, in our opinion.
   
• Operationally, management is optimistic on 2024 and expect the profit growth to come from: 1) strong air-travel demand and Capital A has ample flight capacity to cope with the demand growth, 2) rise in ancillary income with launches of new services such as Fastpass (express immigration), ZoneUp (seat upgrade) and an enhanced travel insurance package, and 3) normalisation in maintenance cost.

Valuation

• Despite bullish outlook, the AAX and SPAC share entitlement details are not in full display so we would not advise investors to Buy Capital A now. However, since Capital A’s share price has corrected 28% since our last downgrade in Aug-23, we upgrade the stock to Hold with a revised target price of RM0.77/share (from RM0.85 previously) based on 9x CY24 earnings.

Source: TA Research - 1 Mar 2024