Investment Highlights

• We downgrade our call to HOLD from BUY following the steep jump in AirAsia share price this morning, driven largely by the announcement of a 90 sen special dividend. We revise our FV to RM2.97 (from RM3.04 previously) and cut our FY19–21F net profit forecasts by 32%, 15% and 6% respectively largely to reflect: (1) a weak 1QFY19 results; and (2) higher interest expense arising from the special dividend that will cost AirAsia about RM3bil.

• The basis for our revised FV is 8x post-special dividend FY20F EPS plus 90 sen special dividend (that will be distributed in Aug 2019). We previously valued AirAsia at 10x FY20F EPS. The reduction in the P/E multiple is to reflect AirAsia’s higher risk premium with an increased net gearing after the special dividend. AirAsia’s much larger global peers Ryanair and Southwest Airlines trade at an average forward P/E of 11x.

• AirAsia’s 1QFY19 core net profit of RM104.6mil missed expectations, coming in at only 11% of our full-year forecast and the full-year consensus estimates respectively. The variance against our forecast came largely from higher operating costs, specifically, maintenance and overhaul costs (up 64% YoY on the back of more maintenance provisions provided for the higher number of leased aircraft). On the other hand, its topline grew 13% YoY underpinned by an 18% increase in total passengers carried backed by a 17% expansion in capacity.

• Key highlights from the briefing yesterday are: 1) On the digital side, the group has shown encouraging growth. Its non-airline EBITDA has turned profitable at RM39mil compared with a loss of RM7mil in 1Q2018, translating into a 7x growth YoY, mainly contributed by Teleport (which manages the aircraft freight belly space), recording RM101mil in revenue, in line with its revenue target of RM400mil this year. It is targeting to launch a social commerce enabler, teleport.social in 2019. 2) Moving forward, we believe AirAsia’s key strategy is to aggressively grow its topline to mitigate the higher cost structure arising from its planes that are now largely leased vs. owned previously.

• We believe AirAsia remains a good proxy to the growing low-cost air travel market in the region, underpinned by rising per capita incomes and a young demographic. Its strong market presence (in terms of the number of routes, and frequencies for each route) enables it to compete effectively against its rivals (both low-cost and full-service). It has also struck a chord with investors with its plans to monetise some of its auxiliary businesses and assets which translate to special dividend payouts to shareholders.

Source: AmInvest Research - 30 May 2019