Airasia Group Berhad - Higher Share of Associates’ Losses

Date: 29/08/2019

Source  :  PUBLIC BANK
Stock  :  AIRASIA       Price Target  :  1.89      |      Price Call  :  HOLD
        Last Price  :  1.69      |      Upside/Downside  :  +0.20 (11.83%)

AirAsia Group (AAGB) reported a lower net profit of RM17.3m in 2QFY19, mainly due to the recognition of prior year share of associates’ losses not recognised for AirAsia India (AAI) of RM147m. Also, after excluding other one-off items (i.e. forex gain, fair value gain on derivatives, deferred tax), its core net profit for 1HFY19 stood at RM11.6m, which was below our and consensus’ full year expectations, accounting only for 2.6% and 1.7% respectively. The discrepancy was mainly due to higher-than-expected finance costs from the MFRS16 impact. EBITDA however was within our full year estimates at 48% of our forecast. We adjust our numbers accordingly, which reduces our earnings for FY19-21F by an average of 24%. As a result, our target price is now reduced to RM1.89, pegged to 11x FY20F EPS (previously RM2.33). Our Neutral call on AirAsia is retained.

  • Revenue for airline grew 17% during the quarter to RM3bn on the back of higher passengers carried (+18%) and unit passenger revenue (+2.3%). Its Group’s revenue per average seat km (RASK) increased 3.8% YoY to 15.40 sen (vs 2Q18: 14.83 sen), primarily from its Philippines (PAA) (+5%) and Indonesian (IAA)’s (+6%) units. Malaysia’s (MAA) operation however reported lower RASK (-1%) in 2Q19. For 1HFY19, airline revenue grew 13% YoY owing to higher number of passengers carried (+18) and RASK (+3.4%).
  • Higher CASK due to higher aircraft maintenance provision, coupled with weakening Ringgit and Rupiah. Cost per ASK excluding fuel (CASK ex-fuel) in 2Q19 jumped 24% YoY at 9.95 sen (vs 2Q18: 8.05 sen) on the back of; 1) higher aircraft maintenance provision post-aircraft monetization exercise in 2018 (i.e. sale and leaseback aircraft arrangement), which led to higher aircraft operating leases, 2) weakening Ringgit (-4.5%) and Rupiah (- 1.3%) against USD, and 3) higher costs relating to RedBeat Ventures (RBV). For 1HFY19, CASK ex-fuel escalated 17% YoY to 9.55 sen, compared to 8.14 sen in 1HFY18.

Average fuel cost declined slightly by 2% to USD87 per barrel in 2Q19 (vs 2Q18: USD89/bbl). Despite that, the Group recorded higher aircraft fuel expenses at RM1.07bn (+18% YoY) as its fuel consumption increased by 15.6% YoY to 3m barrels. As a result, CASK jumped 14.5% from 13.77 sen in 2Q18 to 15.77 sen in 2Q19. For 1HFY19, CASK increased 11% YoY, from 13.66 sen to 15.17 sen.

  • Lower EBITDA amid higher share of associates’ losses. EBITDA for 2Q19 fell 9% YoY to RM472.6m. We understand that during the quarter, the Group injected additional investments into AirAsia India (AAI). Consequently, it recognized the share of unrecognized losses up to the extent of the additional investment amounting to RM147m. To note, there is another RM94.6m of unrecognized losses as at end-June 2019. We understand that the Group will be injecting another USD30-40m within the next 12 months period. Excluding that, its associates reported higher losses of RM78m (vs 2Q18: loss of RM49.5m). For 1HFY19, EBITDA increased 2% to RM1.18bn, making up 48% of our full year forecast.
  • Fleet plan. The Group has targeted for a net fleet growth of 20 aircraft this year across its air operator’s certificate (AOCs), with the first A321neo expected to be delivered in November 2019. This will be taken mainly by the Indian unit (AAI), 9 aircraft in total, as it plans to expand into international routes by 2H19. Meanwhile, the consolidated AOCs (Malaysia, Philippines, Indonesia units) are expected to grow by 9 aircraft in FY19. To-date, it expect to received 5 more deliveries in 2H19 (Table 4). To-date, the Group still owns 26 aircraft (i.e. Malaysia: 5, Thailand: 21), while the rest are currently under operating leases.
  • Fuel hedging status. To-date, the Group has hedged 65% of Brent crude at USD63.31/bbl for FY19, hedged 73% for FY20 at USD60.22/bbl and 19% for FY21 at USD59.45/bbl.
  • Corporate structure reorganisation. The Group is currently focusing on reorganizing its corporate structure into 3 businesses i.e. Airlines, AirAsia.com and RedBeat Ventures (e.g. Teleport, BigPay, Santan/T&Co, AirAsia Big Loyalty). We understand that Teleport (Logistics business) is expected to seek tie-ups with different airlines and to tap into parcel delivery services to SMEs. Meanwhile, BigPay (financial platform business) will be rolling out remittance and lending business to multiple markets in ASEAN by stages from 2H19. It also targets to get an e-money license (e-wallet) in Singapore by this year.

Source: PublicInvest Research - 29 Aug 2019

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