Reported 1HFY18 core PATMI of RM666.0m (+5.7% YoY), in line with HLIB forecast and consensus. The increase in passenger traffic and ticket yield as well as leaner cost structure, managed to offset the higher jet fuel cost. In terms of AOC, MAA profit has improved to offset the decline in other AOCs. Management expects further yields improvement in 2H18. Disposal of AAC is on track to complete in 4QFY18 and a further special dividend up to RM1.00/share can be expected. Maintain BUY with unchanged SOP-derived TP: RM4.65.

Within expectation. AirAsia Group (AAG) reported a core PATMI of RM319.1m for 2QFY18 and RM666.0m for 1HFY18, achieving 46.3% of HLIB’s FY18 forecast and 48.1% of consensus. We expect stronger earnings in 2H18 on seasonally stronger air travel demand, especially in the Malaysia market.

QoQ. Core PATMI declined 8.0%, dragged by attributed RM45.9m loss from JVs/associates in 2QFY18 as compared to RM55.5m profit in 1QFY18. The higher overall yields QoQ for AirAsia group (MAA, IAA and PAA) and lower depreciation charges (transfer of aircrafts to BBAM) improved group EBIT QoQ.

YoY. Despite the higher ticket yields and passenger carried (figure #2), core PATMI declined 6.1% due to: (i) higher jet fuel cost; and (ii) attributed loss from JVs/associates, following loss in TAA and higher loss in JAA.

YTD. Core PATMI improved 5.7%, leveraging on the stronger MAA earnings (100% subsidiary) for higher passengers carried and ticket yields, which was partially offset by the weaker performances of other partially owned AOCs (TAA, IAA, AAI and JAA).

Outlook: Management expects yield (started to raise fares since Jun 2018) and ancillary income to improve towards 2H18 given the strong regional air travel demand (especially in Malaysia) while competitions are slowing down with major regional airlines reducing flights (e.g. MAS, Malindo, Garuda and Cebu). 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.

IAA & PAA: IAA was affected by volcano eruptions in Bali-Lombok islands while PAA was affected by closure of Boracay island. We expect PAA result to improve in 4QFY18 when Boracay island reopen in Oct 2018 while IAA to only show recovery in FY19. IAA will retake the 8 aircrafts from IAAX and proceed with secondary listing exercise to raise funds by end 2018. PAA is still on track for listing in 2H19.

AAI & JAA: Both AAI & JAA remained in the red as both AOCs were still in expansion and start-up stages. AAG has injected another RM72m into JAA in the quarter and increased its shareholding to 66.9%. Management expects further cash injection of USD15-20m is needed before both AOCs turn profitable in FY2020-21.

Special dividend. Management indicated a special dividend distribution of up to RM1.00/share by end 2018, following the completion of disposal of AAC. AAG has completed 2nd phase of the exercise with 39 aircrafts being transferred and received USD500m in Aug 2018 and targeted another 45 aircrafts for USD680m by Nov 2018.

Forecast. Unchanged.

Maintain BUY, TP: RM4.65. We maintain our BUY recommendation on AAG with SOP-derived TP of RM4.65. We maintain 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 - 3 Sept 2018