Reported 1QFY18 core PATMI of RM346.9m (-9.1% QoQ; +19.4% YoY), we deem to be below expectation, given the YTD substantial increase in jet fuel price. We cut FY18 and FY19 earnings by 22.4% and 17.3% respectively. Declared net interim dividend 12 sen/share. Management indicated further special dividend up to RM1.00/share following complete disposal of AAC and Expe dia in 3Q18. Maintain BUY with lower SOP-derived TP: RM4.65.

Below expectation. AirAsia Group (AAG) reported a core PATMI of RM346.9m, achieving 18.7% of HLIB’s FY17 forecast and 22.1% of consensus, after excluding the disposal gain of RM350m for GTR and re-measurement gain of RM535m for AAC. 1Q usually contributes circa 20% to full year profit (due to weak seasonality). As such, we deem 1Q18 results to be below expectation given the continuous rise in jet fuel cost to above USD90/barrel YTD and increasing cost structure which would impact its margin for upcoming quarters.

Dividend: Declared net interim dividend 12 sen/share.

QoQ. Core PATMI declined by 9.1%, affected by: (1) seasonally lower yield and ancillary income; and (ii) higher jet fuel cost. Nevertheless, the slide was partially offset by stronger associate contribution (mainly TAA) and lower net financing cost.

YoY. Core PATMI increased by 19.4% attributed to: (1) higher associate contribution from TAA; and (ii) higher core loss attributed to minority interest of IAA, following IAA operation was affected by Mt. Agung volcanic eruption in 1Q18.

Outlook: Management expects yield and ancillary income to improve towards 2H18 given the strong regional air travel demand. However, the increase in jet fuel price will increase AAG cost structure. Management will continue to focus on improving its operational efficiency and reduce its non-fuel cost/unit while improving its yield and ancillary income to offset the higher jet fuel cost. AAG will hedge its jet fuel cost requirement in tandem with the percentage sales of total available seat capacity.

PAA: Despite the closure of Boracay island to tourist for 6 months beginning end April 2018, management has reallocated traffic routes to other Philippines destinations mainly to Cebu and guided continued strong demand for PAA. Management is maintaining positive profit outlook for PAA in 2018 and PAA is on track for listing in 2H19.

Special dividend. Management indicated a special dividend distribution by end 2018, following the completion of disposal of AAC and Expedia by 3Q18. The payout is potentially up to RM1.00/share.

Forecast. Cut core profit forecasts for FY18 and FY19 by 22.4% and 17.3% respectively to account for the higher assumptions of jet fuel price. We introduce FY20 PATMI at RM1.7bn.

Maintain BUY, TP: RM4.65. Following the adjustment in profit forecasts, we lower our SOP-derived TP to RM4.65 from RM5.16. We remain positive outlook on AAG, given (1) strong air travel demand and high load factors, (2) potentially higher yield to partially offset the current high jet fuel price and (3) expected high dividend payout by end 2018.

Source: Hong Leong Investment Bank Research - 25 May 2018