AirAsia Group Berhad - Higher Maintenance & Overhaul Cost

Date: 30/05/2019

Source  :  PUBLIC BANK
Stock  :  AIRASIA       Price Target  :  2.33      |      Price Call  :  HOLD
        Last Price  :  1.67      |      Upside/Downside  :  +0.66 (39.52%)

AirAsia reported lower net profit in 1QFY19 to RM96.1m. Excluding forex gain, tax incentive and FV gain on derivatives of RM8m, its core net profit stood at RM104.6m (-71% YoY). The results were below ours and consensus’ full year estimates, accounting for 10% and 11% respectively. The discrepancies were mainly due to higher-than-expected maintenance & overhaul and user charges cost. Higher maintenance and overhaul cost (+64% YoY) was owing to higher number of leased aircraft post aircraft monetization exercise in 2018. To note, there is a differing accounting treatment for major overhaul cost for leased aircraft and owned aircraft. For aircraft under lease agreement, any major overhaul will now need to be expensed immediately to P&L, according to MFRS16. We adjust accordingly our estimates to reflect the adjustments for FY19-21F. As a result, our earnings was cut by an average of 47%. We downgrade our call on AirAsia to Neutral, and revise downwards our target price to RM2.33 (previously RM3.50) pegged on 11x of FY19F EPS. AirAsia declare a special dividend of 90 sen, translating to a 34% dividend yield.

  • Higher airline revenue due to higher RASK. For 1Q19, revenue surged by 9% YoY to RM2.8bn, despite the increase in available seat per km (ASK) by 11% YoY. This was mainly due to a 3% YoY increase in revenue per average seat km (RASK) to 15.10sen, coupled with higher passengers carried during the quarter of 18% YoY. This was in line with its passenger seats sales that jumped by 15% YoY to RM2.1bn. Meanwhile, ancillary revenue jump by 29% YoY to RM663.7m. However, its unit passenger revenue declined by 3% from RM218 to RM212 per pax.
  • Higher CASK due to higher maintenance & overhaul cost and weaker currency. Cost per average seat km excluding fuel (CASK ex-fuel) in 1Q19 escalated by 11% YoY to 9.14 sen (vs 8.22 sen in 1Q18). This was on the back of higher maintenance & overhaul cost as well as depreciation of Ringgit and Rupiah. We understand that due to MFRS16, there is an additional non cash maintenance provision of c.RM100m in 1Q19 due to higher number of leased aircraft post its sale-and-leaseback aircraft arrangement. Average fuel cost was flat YoY at USD83 per barrel in 1Q19, with fuel consumption increased by 8% YoY to 2.8m barrels. Correspondingly, the Group recorded higher aircraft fuel expenses to RM956.7m (+12% YoY), resulting CASK to increase from 13.55 sen to 14.57 sen. Overall, core net profit for 1Q19 declined 71% YoY to RM104.6m.
  • Outlook. The Group expect all its ASEAN air operator’s certificate (AOCs) to be profitable for 2019. It will be adding net 18 aircraft in 2019, of which 11 aircraft will be allocated for AA India (AAI) (Table 4). AAI is expected to receive the approval to fly international by October 2019. We also understand that the Group is expecting to monetize another 9 aircraft in the immediate term, estimated to be c.RM1.5bn. The proceeds will be to finance part of the 90 sen special dividend payout.
  • Special dividend of 90 sen. AirAsia declared a special dividend of 90 sen/share, translating to a dividend yield of 31%. The dividend payout will be partly financed by the proceeds received from recent disposal of 25 aircraft to Castlelake. The dividend payment was set to be paid on 29 August 2019.

Source: PublicInvest Research - 30 May 2019

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