Reported 2QFY19 core LATMI of RM81.0m, dragged 1HFY19 PATMI down to RM9.3m, below both HLIB’s expectation and consensus, due to: 1) lower than expected ticket yields for MAA and TAA; 2) higher than expected provisions for maintenance costs. Cut FY19-FY21 PATMI by 42.9%, 23.7% and 19.8% respectively. Downgrade to HOLD (from Buy) with lower TP: RM1.86 (from RM3.35) post earnings revision and 90sen special dividend (ex-date: 29 Jul).

Below expectations. AirAsia Group (AAG) reported unexpected 2QFY19 core LATMI of RM81.0m, which dragged 1HFY19 core PATMI down to RM9.3m (excluded deferred tax gain of RM141.3m and one-off RM147.0m loss in investment in India). Despite the expected stronger earnings in 2HFY19, we still deem 1H19 results below both HLIB (1.6%) and consensus (1.4%) full year forecast. The result was dragged by: (1) lower than expected ticket yields for MAA and TAA and (2) higher than expected accounting impact (non-cash) for the provision of maintenance costs following disposal of assets (additional RM100m in 1QFY19 and RM160m in 2QFY19).

QoQ. Core LATMI of RM81.0m (vs PATMI RM90.2m in 1QFY19) due to: 1) lower EBIT margins on increased accounting impact of lease rental costs at RM160m in 2QFY19 vs RM100m in 1QFY19; and 2) RM50m loss drag from TAA in 2QFY19 (seasonal lower yield quarter) from RM50m profit contribution in 1QFY19.

YoY/YTD. Results deteriorated significantly to LATMI RM81.0m in 2QFY19 (vs. PATMI RM308.1m in 2QFY18) and PATMI RM9.3m in 1HFY19 (vs. RM644.m in 1HFY18) following: 1) lower ticket yields for MAA operations; 2) sales and leaseback exercise of A320 fleets, causing increased cost recognition under MFRS 16 and provisions for maintenance costs (RM100m in 1QFY19 and RM160m for 1HFY19); and 3) higher losses from TAA and JAA.

Positives. Operations of PAA (Philippines), IAA (Indonesia) and AAI (India) have shown result improvements in 2QFY19 (see figures #3-6). PAA reported second consecutive quarterly profits on improved yields (following re-opening of Boracay island) while both IAA and AAI reported substantial lower losses on improved yields and better cost managements, potentially to turnaround in 2HFY19.

Concerns. Results of MAA (Malaysia) and TAA (Thailand) have deteriorated further on declining yields (see figure #5) due to increased competitions and higher accounting operational costs post sales and leases back exercises (MAA). Management is strategizing in improving the overall yields and ancillary income in order to improve profitability of MAA in 2HFY19 and turnaround TAA in 4QFY19.

Outlook. Management remains confident of its ASEAN AOCs (MAA, TAA, IAA and PAA) to be profitable in 2019, driven by improving yields with sustained load factor above 85% and improving cost efficiency. AAG will have a net addition of 20 aircrafts mainly for the India market in expanding into the international market. AAG has already hedged 70% and 85% of fuel requirement for 3QFY19 and 4QFY19 at average jet fuel costs of USD76.3/bbl and USD/75.9/bbl.

Forecast. Cut earnings FY19-21 by 42.9%, 23.7% and 19.8% respectively, after imputing for lower yields for MAA and TAA and higher provisions for maintenance.

Downgrade to HOLD, TP: RM1.86. Following the cut in earnings forecasts and distribution of 90sen/share dividend payout (ex-date: 29 Jul), we downgrade our recommendation to HOLD (from Buy) on AAG with lower TP: RM1.86 (from RM3.35 inclusive of 90sen dividend), as we are concern on the increased competitiveness in Malaysia and Thailand market.

Source: Hong Leong Investment Bank Research - 29 Aug 2019