Reported 3QFY19 core LATMI of RM86.1m, dragged 9MFY19 to LATMI RM76.9m, below both HLIB’s expectation and consensus, due to: 1) lower than expected ticket yields for MAA and TAA; and 2) higher than expected provisions for maintenance costs. Cut FY19-FY21 PATMI to RM30.7m, RM451.4m and RM613.3m (from RM327.2m, RM509.2m and RM716.2m). Maintain HOLD with lower TP: RM1.62 (from RM1.86) based on higher 20% discount (from 10%) to SOP: RM2.02.

Below expectations. AirAsia Group (AAG) continued to report core LATMI RM86.1m in 3QFY19, dragged 9MFY19 to core LATMI RM76.9m (excluded deferred tax gain of RM433.6m and one-off RM147.0m loss in investment in India), below both HLIB and consensus full year profit 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, RM160m in 2QFY19 and RM110m in 3QFY19).

QoQ. Core LATMI deteriorated further in 3QFY19 to RM86.1m (vs. LATMI RM81.0m in 2QFY19) mainly from continued losses of Malaysia operations on lower competitive yields and PAA reverted back to loss on seasonal weak quarter (see Figure #4).

YoY/YTD. Results deteriorated significantly to LATMI RM86.1m in 3QFY19 (vs. PATMI RM144.4m in 3QFY18) and LATMI RM76.9m in 9MFY19 (vs. PATMI RM788.3m in 9MFY18) 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 (RM110m in 2QFY19 and RM370m for 9MFY19); and 3) higher losses from TAA.

Positives. Operations of PAA (Philippines), IAA (Indonesia) and AAI (India) have shown YoY improvements in 3QFY19 (see figures #3-6). PAA’s loss during the quarter was due to seasonally weak quarter as compared to IAA continued profit from a seasonally strong quarter. Similar to PAA, AAI is also seasonally weak in 3Q.

Concerns. Results of MAA (Malaysia) and TAA (Thailand) continued to deteriorate in 3QFY19 with weaken yields (see figure #5) due to market slowdown with increased competition. The higher accounting operational costs post sales and leases back exercises and investments into digitalization start-up had also taken toll on MAA. Management is strategizing in improving the overall yields and ancillary income in order to improve profitability of MAA and turnaround TAA in 4QFY19 and FY20.

Outlook. Management remains confident of its ASEAN AOCs (MAA, TAA, IAA and PAA) to be profitable in 2020, driven by improving yields with sustained load factor above 85% and improving cost efficiency. AAG will have a net addition of 18 aircrafts (4 A321 NEO) in FY19 and 12 (6 A321 NEO) in FY20, mainly for India in expanding into the international market. AAG has already hedged 86% and 73% of fuel requirement for 4QFY19 and FY20 at average jet fuel costs of USD73.7/bbl and USD75.7/bbl.

Forecast. Cut earnings FY19-21 to RM30.7m, RM451.4m and RM613.3m (from RM327.2m, RM509.2m and RM716.2m).

Maintain HOLD, TP: RM1.62. Maintain HOLD recommendation on AAG with lower TP: RM1.62 (from RM1.86) based on higher 20% discount (from 10%) on SOP: RM2.02, as we see heightened risk of market slowdown, competition as well as regulations towards the group. Nevertheless, we are positive on AAG’s strategic growth in leveraging into digitalization to enhance the group’s earnings.

Source: Hong Leong Investment Bank Research - 4 Dec 2019