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 parity to its FY18–FY19 pre-pandemic average.

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

• Our forecasts are unchanged as Capital A’s 9MFY22 core net loss (CNL) of RM1.7bil (stripping off the group’s forex losses of RM792mil, AirAsia Thailand associate’s forex losses of RM295mil and RM45mil fair value gains on derivatives) came in fairly in line with expectations despite accounting for 82% of our FY22F CNL and 92% of street estimates.

• This is backed by expectations of imminent earnings recovery in the aviation division over the upcoming quarters as global air travel demand growth continues gathering pace in the post-pandemic era.

• YoY, the group’s 9MFY22 revenue escalated 4x to RM4.2bil, mainly driven by higher aviation revenue from increased number of carried passengers as well as inflated average fares (Exhibit 3). Subsequently, 9MFY22 CNL narrowed by 11%, aided by relatively lower operating expenses that offset higher depreciation charges and finance costs.

• QoQ, 3QFY22 revenue grew by 34% to RM2.0bil, also due to higher aviation revenue which increased by 33% to RM1.8bil from RM1.4bil in 2QFY22. The group continued to achieve profitability at the EBITDA level in 3QFY22 at RM72mil (-34% QoQ) on the back of the sustained contributions from the aviation and engineering segments.

• In 3QFY22, Capital A carried a higher number of passengers, up 28% QoQ to 7.1mil passengers alongside a 26% QoQ rise in seat capacity to 8.3mil units. The increase in seat capacity mainly stemmed from a bigger operational fleet of 103 aircraft in the quarter, up from 90 aircraft in 2QFY22.

• To capitalise on the recovering air travel demand, the group remains focused on getting its aircraft back in the air with a target to restore capacity to nearly pre-COVID levels and fully operate its fleet by 2QFY23. By the end of FY22, management foresees domestic capacity to reach 73% of pre-pandemic levels while international attain 48%.

• This bodes well for an earnings recovery in the aviation segment, paving the path for the eventual return to profitability in the group’s FY23F earnings, which would be earlier than our current assumptions.

• Non-aviation operations, which accounted for 20% of 9MFY22 revenue, include Asia Digital Engineering (which provides aviation maintenance, repair and overhaul services), Teleport (end-to-end logistics), and Digital (AirAsia Super App and BigPay) segments. This division upheld its growth trajectory with a remarkable 52% YoY revenue rebound for the same period, which could partly support the group’s plan to rebrand Capital A as a prominent aviation services and digital company upon implementing its PN17 regularisation plan.

• The PN17 regularisation plan is gradually making headways, in which CEO Tony Fernandes confirmed would involve the divestiture of its aviation arm AirAsia Aviation Grop to sister company AirAsia X (AAX). This implies that 4 airlines under Capital A (namely AirAsia Malaysia, AirAsia Thailand, AirAsia Philippines and AirAsia Indonesia) will be injected into AAX (which operates AAX Malaysia and AAX Thailand) to become a consolidated low-cost airline group, which will remain listed on Bursa Malaysia under AAX.

• Capital A will then receive AAX shares as proceeds of disposal through a share swap arrangement and distribute those shares back to its shareholders. Meanwhile, Capital A will also be keeping its non-aviation divisions including Asia Digital Engineering, Teleport, airasia SuperApp, and BigPay.

• To facilitate the plan, the group is seeking a 6-month extension to 7 July 2023 from Bursa Malaysia for the submission of the regularisation plan. Management expects the regularisation plan to be approved by Bursa Malaysia by February next year, with a target to be fully implemented by July 2023. We also note that sequential corporate developments upon lifting the PN17 status would be the spinning off of Capital A’s aviation services division to US or Singapore stock markets, followed by digital assets thereafter.

• We are positive on the restructuring plan as it will not only resolve the PN17 status, but also unlock non-aviation assets’ intrinsic value. However, this also means the company would not benefit from the rebound in air travel demand after divesting aviation operations.

• 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 derailed recovery in air travel demand and further escalation of competitive pressures within the airline industry.

Source: AmInvest Research - 1 Dec 2022