Investment Highlights

• We maintain HOLD on Capital A (formerly AirAsia Group) with an unchanged fair value of RM0.60/share, pegged to FY24F P/E of 5x at its FY18–FY19 pre-pandemic average.

• Our fair value incorporates a 3% premium to account for an unchanged 4-star ESG rating (Exhibit 4), underpinned by the group’s continuous efforts to gradually replace its air fleet with more fuel-efficient Airbus A321neos from 2024 onwards, which are expected to reduce carbon emissions/seat by 20%.

• We foresee further delays in earnings recovery as the aviation sector’s demand-supply dynamics remain challenging at this juncture. Hence, after lowering capacity assumptions mainly from a reduced operational aircraft fleet, we trim our FY22F forecasts by 16% as well as reverse FY23F to a core net loss of RM242mil from a net profit of RM138mil previously.

• We gather that the group is encountering persistent delays in getting its grounded aircraft back in the air due to the global contraints on maintenance, repair and overhaul (MRO) capacity. Note that grounded aircraft need to undergo heavy aircraft maintenance namely “C-checks”, which takes 4-6 weeks, before returning to service.

• However, MRO providers have been experiencing capacity bottlenecks due labour shortages and supply chain disruptions. Thus, the group reduced the total number of operational fleet to 160 aircraft by end of 2022 (versus the management’s previous target of 178 aircraft back in May 2022), in which we estimate may result in a 5-14% decrease in FY22F-23F available seat kilometers (ASK).

• Nevertheless, we still expect the group to fly all its aircraft by the end of FY23 which supports its sequential return to profitability. As at end-August 2022, it operates 108 aircraft, which represents half of its consolidated fleet.

• On demand outlook, while we reckon there is a commendable improvement in air travel globally, prolonged lockdowns in key markets such as China continues to cloud the recovery momentum. Recall that China is one of the group’s key markets, accounting for 10% of 2019 passenger traffic.

• Even so, the group is targeting to carry 40mil passengers (including passengers carried by 45%-owned Thai AirAsia Co.) in FY22F, as opposed to our more conservative assumption of 30.2mil passengers. To recap, the group carried 12.4mil passengers in 1HFY22.

• On another note, we also caution that fuel costs are likely to stay elevated as the recent pullback in oil prices may be largely offset by the weaker MYR against USD, which has depreciated by 10% year-to-date.

• We understand that management is still on track in formulating the PN17 regularisation plans (to be submitted by January 2023), which are not likely to involve proposals that will result in further share dilution. Despite a lack of clarity, we gather that potential restructuring initiatives may include spinning off its airline and digital divisions in the US stock market. At this juncture, we view depressed global stock market sentiments to be a key hurdle for alternative listing prospects.

• Valuation-wise, the stock is currently trading at a fair FY24F P/E of 5x, close to its 2-year FY18–FY19 prepandemic average. Key downside risks include a further slowdown in air travel demand and escalation of competitive pressures within the airline industry.

Source: AmInvest Research - 5 Oct 2022