Reported core LATMI of -RM668.9m for 3QFY22 and -RM2.2bn for 9MFY22, within HLIB’s FY22 expectation (LATMI -RM2.4bn), but below consensus (-RM1.9bn). We expect continued recovery momentum in coming quarters (turnaround in FY23-24) driven by capacity expansion (in tandem with the increasing air travel demand), declining jet fuel price trend and softening USD. PN17 status will be addressed with the disposal of Aviation Group to AAX. Maintain BUY with an unchanged TP: RM0.88 (8x FY24 FD-PE).

Within expectations. CapA reported lower core LATMI -RM668.9m for 3QFY22, which dragged 9MFY22 to LATMI -RM2.2bn. The results were within HLIB’s FY22 expectation of LATMI -RM2.4bn, but below consensus’ -RM1.9bn. We expect lower losses in 4QFY22 as air demand further improve with more countries reopening their borders and remove restrictions, depreciation of USD against regional currencies and easing of jet fuel price, as well as continued traction of digital segment.

QoQ. Core LATMI narrowed further by -4.4% attributed to stronger performance of Digital Ventures as both Teleport and SuperApp gained traction from higher business volumes, which was partially offset by weaker performance of aviation segment on faster cost expansion (driven by higher fuel costs, maintenance, user charges & others) as compared to revenue expansion.

YoY/YTD. Core LATMI stayed flattish -1.3% YoY but worsen 15.1% YTD mainly dragged by full recognition of losses from Associate TAA (started since 1QFY22), appreciated USD and higher jet fuel costs, despite the stronger group revenue from higher passenger demand.

PN17 status. Regularization plan is currently being finalized and will be submitted to Bursa by early 2023. Overall plan is for CapA to dividend-in-specie out Aviation Group (all the AOCs) and subsequently be acquired by AAX (to be renamed as Aviation Group), which will address the negative shareholder’s equity issue (likely due to goodwill). Post restructuring, CapA will be a pure aviation services and digital group (see Figure #9) and AirAsia Group (previously AAX) will own all the AOCs.

Air travel recovery. Air travel demand recovery remains on track as more countries have reopened borders (recently HK, Taiwan, Japan and S.Korea) and relaxed travel requirements. Management guided on operating 140 aircrafts by end FY22 (from 103 in 3QFY22) and targets full fleet operation (211 aircrafts) by 2QFY23. The group will also benefit from the declining jet fuel prices and softening USD. Management remains positive on current yield environment given the rational pricings.

Digital ventures. Digital platforms (ADE, AirAsia.com, Teleport, BigPay) continues to gain traction in 3QFY22. Profitable ADE is securing new hangars to expand its capacity to 7 lines by year end, and targeting to expand customer base to non-AirAsia group (currently 1% of revenue). SuperApp further expanded its EBITDA to RM15.8m in 3QFY22, driven by increase in transaction volume and value. Management expects continued growth momentum in tandem with increasing travel demand and expanding market reach. Teleport’s turnaround in 3QFY22 was driven by increasing leverage onto belly cargo space and is expected to grow further from increasing the group’s network capacity. BigPay remains in the red due to ongoing investment costs.

Forecast. Unchanged

Maintain BUY, TP: RM0.88. Maintain BUY on CapA with an unchanged TP of RM0.88, based on unchanged 8x FD PE tagged to FY24 EPS on improving air-travel outlook.

Source: Hong Leong Investment Bank Research - 1 Dec 2022