Reported 1QFY19 core PATMI of RM102.3m, below both HLIB’s expectation and consensus, dragged by higher than expected operational costs and impact from MFRS 16. Cut FY19 and FY20 PATMI by 45.5% and 40.1% respectively, and introduce FY21 PATMI at RM 885.8m. Declared special dividend of 90 sen/share. Maintain BUY with higher TP: RM3.35 (from RM3.20), based on discount to SOP and accounting for the attractive special dividend payout of 90sen/share.

Below expectations. AirAsia Group (AAG) reported core PATMI of RM102.3m, achieving only 9.7% of HLIB’s FY19 forecast and 11.1% of consensus, dragged by higher than expected 1) maintenance costs; 2) non-airline related operational costs and; 3) net impact from MFRS 16 accounting of RM38.3m.

Dividend: Declared special dividend 90 sen/share.

QoQ. Core PATMI returned to the black of RM102.3m (vs. -RM83.1m in 4QFY18) due to: 1) higher group revenue on improved load factor (see Figure #2); 2) lower jet fuel price at US$83/bbl (vs. US$92/bbl in 4QFY18); and 3) appreciation of RM/US$ to average 4.08 (vs. 4.17 in 4QFY18).

YoY. Core PATMI declined 69.6%, dragged by: 1) depreciation of RM/US$ to average 4.08 (vs. 3.89 in 1QFY18); and 2) net negative impact of RM38.3m accounting for MFRS 16; and 3) lower contribution from associate TAA on lower average yields.

MFRS 16: The implementation of MFRS 16 (finance lease accounting) effective 2019 has a net negative RM38.3m impact to AAG’s bottomline following a combined higher recognition of depreciation charge on Rights-of-Use (RM381.2m) and finance cost on Lease Liabilities (RM106.9m) as compared to the previous accounting method for Operating Lease (RM449.9m). The depreciation is based on an average lease period of 6 years for AAG’s leased-in fleets.

Outlook: Management remains confident of its ASEAN AOCs (MAA, TAA, IAA and PAA) to be profitable in 2019, as the group expects improving yields with sustained load factor above 85% while continuing to improve cost efficiency and taking advantage of the drop in jet fuel price (see Figure #5). AAG will have a net addition of 18 aircrafts mainly for the India market in expanding into international market. Management is targeting AAI for turnaround in FY19.

Fuel hedge: AAG has already hedged 52%-57% of our fuel requirement for 2Q-4Q19 at average Brent hedge prices of US$61-64/bbl. Management expects average jet fuel cost at US$80/bbl in FY19.

AirAsia 3.0. AAG will continue to leverage on digitalization and large database to improve its cost efficiency and enhance new revenue platforms i.e. AirAsia.com portal, Teleport courier and logistics and BigPay financial services. Teleport has been making good progress in 1QFY19 with positive EBITDA of RM51.8m. Furthermore, management expects minimal capex for the development of these new platforms.

Forecast. Cut earnings FY19-20 by 45.5% and 40.1% respectively, after imputing for higher operating costs post MFRS 16. Introduce FY21 PATMI at RM885.8m.

Maintain BUY, TP: RM3.35. Despite cutting our earnings forecasts, we maintain BUY on AAG with higher TP: RM3.35 (from RM3.20) as we account for the attractive special dividend payout of 90sen/share. Furthermore, we remain positive on AAG’s outlook, given: 1) high load factors; and 2) potentially higher yield and ancillary/other income.

Source: Hong Leong Investment Bank Research - 30 May 2019