Reported 4QFY19 core LATMI of RM77.3m, dragged FY19 to LATMI RM154.2m, 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. The recent outbreak of Covid-19 has affected the overall demand and yields of AAG, while the management is actively managing its capacity and strategizing in cost cutting measures. Maintain HOLD with unchanged TP: RM1.16 based on 30% discount to SOP: RM1.66.

Below expectations. AirAsia Group (AAG) continued to report core LATMI RM77.3m in 4QFY19, which further dragged FY19 to core LATMI RM154.2 (excluded deferred tax gain of RM294.0m and one-off RM270.0m loss in investment in India), below both HLIB and consensus full year profit forecast. The result was dragged by: (1) lower margins of MAA and TAA and (2) higher than expected accounting impact (non-cash) for the provision of maintenance costs following disposal of assets.

QoQ. Core LATMI improved slightly in 4QFY19 to RM77.3m (vs. LATMI RM86.1m in 3QFY19), mainly on deteriorated Malaysia operations (including RedBeat Venture) on with lower margins and seasonal weak 4Q Indonesia operations (see Figure #4), which was partially offset by improved operations of TAA and PAA in 4Q.

YoY. Core LATMI improved slightly YoY (from LATMI RM83.1m in 4QFY18) mainly on lower losses of TAA and IAA with PAA reversed into profit in 4QFY19, which was offset by the deteriorated Malaysia operations following weakened yields with higher costs structure due to the full exercise of aircraft sales and leasebacks program.

YTD. Results deteriorated significantly to LATMI RM154.2m in FY19 (vs. PATMI RM719.2m in FY18) following: 1) lower yields for MAA operations; 2) sales and leaseback exercise of A320 fleets, causing increased cost recognition under MFRS 16 and provisions for maintenance costs; and 3) higher losses from TAA.

Concerns. The outbreak of Covid-19 has affected the overall travel demand and yield of the aviation sector, including AAG, which is affecting the profitability and cash flow of the group. Management has shared that overall forward bookings has slowed down by more than 20% as compared to previous year, same period.

Actions. Management is strategizing in limiting the downside impact with proactive capacity management i.e. 1) aggressive marketing push; 2) capacity cut; and 3) capacity re-allocation to less affected sector such as domestic, intra ASEAN and India. AAG is also actively implementing cost cutting measures and actively working with stakeholders (airports, governments, aircraft leasing co, maintenance service providers) for better incentives and rebates with stimulus plan in place. AAG is also considering of deferring the delivery of aircrafts in 2020 to 2021 with no penalties involved.

Forecast. Unchanged. We have recently trimmed FY20-21 earnings due to concern on Covid-19 (dated 17 Feb 2020).

Maintain HOLD, TP: RM1.16. Maintain HOLD recommendation on AAG with unchanged TP: RM1.16 based on 30% discount to SOP: RM1.66, as we believe FY20 will be affected by the outbreak of COVID-19, before full recovery in FY21. 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 - 28 Feb 2020