Mega Exceptional Gains Drive 1Q18

AirAsia’s 1Q18 result was a positive surprise, mainly due to exceptional gains of RM882m. Core net profit however fell 7% yoy to RM260m in 1Q18 due to higher operating costs (+23% yoy) especially fuel expenses. We lift EPS by 60% in FY18E for the exceptional gains but cut EPS by 5-7% in FY19-20E to reflect higher fuel costs. A potential special dividend of up to RM0.78/share is on the cards after the disposal of its leasing arm. We reiterate our BUY call with lower TP of RM4.36, based on 10x 2019E target PER.

Exceptional Gains Lift 1Q18 Earnings

AirAsia net profit of RM1.14bn (+85% yoy) in 1Q18 was above market and our expectations, driven by RM882m in exceptional gains, mainly from the disposal of its interest in Ground Team Red Holdings Sdn Bhd (GTRH) and a remeasurement gain on its remaining stake in GTRH.

Lagging Core Earnings

Assuming exceptional gains are not included in consensus forecasts, core net profit of RM260m (-7% yoy) in 1Q18 was below expectations, comprising 16% of consensus full-year forecast of RM1.65bn and 18% of our estimate of RM1.45bn. Understandably, 1Q is seasonally a weak quarter with the strongest quarter in 4Q. Hence, we maintain our core net profit forecasts on expectations of better earnings in 2H18.

Continued Capacity Expansion; RASK However Down 2% Yoy

AirAsia increased capacity by 19% yoy in 1Q18 but itsh load factor eased by 2ppts to 87% as reflected by a declining 1Q18 RASK (-2% yoy) to 14.68 sen. Positively, revenue rose 15% yoy to RM2.56bn in 1Q18, driven by the capacity expansion. CASK was flat at 13.55 sen in 1Q18 despite higher aircraft fuel expenses, maintenance, overhaul and operating lease expenses. EBITDA margin meanwhile, contracted 5.3ppt to 21.4% in 1Q18.

Maintain BUY With a Revised 12-month TP of RM4.36

AirAsia declared an interim DPS of 12 sen (3.7% yield) with ex-date on 12 June 2018. We believe that there is a potential special dividend in 3Q18 (up to 78 sen/share) after its proposed disposal of Asia Aviation Capital Ltd for US$1.19bn. Maintain BUY with a revised TP of RM4.36 (adjusted down from RM5.36 subsequent to earnings revisions in 2019-2020E), which is now based on a target PER of 10x (on FY19E EPS) instead of 12x (on FY18E EPS previously) to reflect our higher oil price assumptions, due to heigthened geopolitical risks. Key downside risk - higher fuel costs.

Source: Affin Hwang Research - 25 May 2018