Reported core LATMI of -RM699.9m for 2QFY22 and -RM1.6bn for 1HFY22, below HLIB’s FY22 expectation (LATMI -RM2.2bn) and consensus (-RM1.4bn). The disappointment was mainly due to slower than expected recovery, increase in jet fuel costs and USD appreciation. Nevertheless, air travel demand is expected to continue its recovery, aiding CapA to turnaround in FY23-24. Maintain BUY with a lower TP: RM0.88 (from RM0.90), based on unchanged 8x FY24 PE (FD).

Below expectations. CapA continued its losses with core LATMI of -RM699.9m for 2QFY22, further dragged 1HFY22 to LATMI -RM1.6bn, which was below both HLIB’s expectation of FY22 LATMI forecast of -RM2.2bn and consensus -RM1.4bn. The weaker than expected earnings was due to slower than expected air demand recovery during the period despite ongoing reopening, as well as the appreciated USD against regional currencies and the surge in jet fuel costs.

QoQ. Core LATMI narrowed by 20.0% attributed to higher passenger traffic across regional operations and lower losses from Digital Ventures as both ADE and SuperApp gained tractions from higher business volumes (partially offset by weaker BigPay on ramping up phase, and Teleport on lower revenue).

YoY/YTD. Despite the higher revenue (increase in passenger traffic), reported core LATMI widened 5.3% YoY to -RM699.9m and 23.3% YTD to -RM1.6bn mainly due to higher opex on staff, maintenance (to restart flights), appreciated USD (against regional currencies), higher jet fuel costs, and combined with new recognition of associate losses since start of FY22 (following the corporate restructuring of TAA).

PN17 status. Regularization plan is currently being finalized and will be submitted to Bursa Malaysia soon. Previously, management has guided the plan will not involve any dilution impact to shareholders or new equity raising. Management has also hinted in the media on the listing of subsidiaries and assets in the US. Despite lack of details, we are hopeful on CapA’s restructuring plan as the management managed to convince auditor E&Y on the group’s cash flow ability for the next 2 years.

Air travel recovery. Regional air travel demand recovery remains on track as ASEAN countries have relaxed cross-border travel requirements. Management updated its guidance on operating 157 aircrafts (previously 178) by end FY22 (from 90 currently), as the group continued to revise network plans according to demand. Overall capacity is expected to reach 60-90% of pre-pandemic level, depending on each countries (see figure #8). The recent drop in jet fuel prices have provided some comfort to its operating costs in 2HFY22. Current yield environment remains healthy given the rational pricings.

Digital ventures. The group’s digital platforms (ADE, AirAsia.com, Teleport, BigPay) continues to gain traction with higher revenue and customer base as the group expands market reach. ADE remains profitable due to high demand for MRO services. SuperApp managed to achieve EBITDA positive with the continued growth momentum of MAU and transactions in 2QFY22. Teleport’s losses expanded during this transitioning period as they moved capacity from passenger planes to freighters. BigPay’s losses also expanded due to negative carry payment and investment ramp up phase.

Forecast. Adjusted FY22 bottomline to -RM2.4bn (from -RM2.2bn), FY23 to +RM91m (from +RM155m) and FY24 to +RM591m (from +RM668m).

Maintain BUY, TP: RM0.88. Maintain BUY on CapA with a lower TP of RM0.88 (from RM0.90), based on unchanged 8x FD PE tagged to FY24 EPS on improving air-travel outlook. Key risk is its PN17 status, affecting the attractiveness of the counter – management is confident in resolving the issue without capital dilution.

Source: Hong Leong Investment Bank Research - 29 Aug 2022