Investment Highlights

• We cut our FY19F–FY21F earnings by 94%, 49% and 21% respectively and reduce our FV to RM1.40 (from RM1.45). The basis of our revised FV is 8x FY21F EPS. Our target PE for AirAsia is at a 30% discount to its much larger global peers (Ryanair and Southwest Airlines) with an average forward PE of about 11x, to reflect AirAsia’s relatively smaller size. Maintain SELL.

• AirAsia disappointed in 9MFY19 with a core net loss of RM6.2mil, vs. our full-year net profit forecast of RM396.8mil and the full-year consensus estimates of RM291.8mil. We believe the variance came largely from higher depreciation and finance cost, coupled with losses from associates.

• 9MFY19 revenue grew 17% YoY underpinned by a 19% growth in passengers carried to 38.4mil in tandem with the capacity expansion of 18% to 22.9mil. This led to a slight improvement of 6% in revenue per average seat kilometre (RASK) to 15.6 sen.

• A core net loss in in 9MFY19 marks a steep deterioration in performance vs. about RM1bil recorded a year ago, largely due to: 1. The negative impact from the change in its business model from an owned to now leased aircraft fleet (that showed up in maintenance and overhaul cost having more than doubled); 2. Higher depreciation and finance costs under the new MFRS 16 accounting standard; 3. RM33mil losses from digital start-ups such as BigPay, AirAsia.com and other Red Beat Venture units (AirAsia had invested an additional RM50mil in this space); and 4. Associate losses due to intense competition in Thailand and India.

• On the other hand, fuel cost for 9MFY19 was benign. Its effective fuel cost fell by 4% as average jet fuel cost averaged at US$85/bbl vs. USD89/bbl a year ago. Looking forward, AirAsia has hedged forward 86% and 73% of its 4QFY19F and FY20F jet fuel requirement at US$73.67/bbl and US$75.74/bbl (Brent) respectively

Source: AmInvest Research - 28 Nov 2019