AirAsia Group Berhad (AirAsia) reported a weak set of results – 3Q18 core pretax profit fell by 83% yoy to RM68.7m (-75% qoq) on higher fuel cost, lower load factor and losses from associates. The group’s 3Q18 headline net profit was however higher at RM916m (+81% yoy, +153% qoq) after booking in forex / disposal gains and large deferred tax assets. AirAsia has declared a special dividend of 40 sen. Overall, the results were below market and our expectations. We cut our 2018- 20E EPS by 19-22% after incorporating the weak 9M18 results and higher fuel cost assumption. In tandem, we have lowered our TP to RM3.20, based on an unchanged 10x 2019E target PER. Maintain BUY – AirAsia’s expected 12-month total return of 20% looks attractive.

3Q18 Core Pretax Profit Hit by Higher Fuel Cost, Lower Load Factors

AirAsia reported a disappointing 3Q18 core pretax profit of RM68.7m (-83% yoy, -75% qoq) on higher fuel costs (US$95/bbl in 3Q18, vs US$63 in 3Q17), lower load factor of 82% (from 87%) and larger losses from associates. Operationally, 3Q18 was a challenging quarter as the Philippines operations was affected by closure of Boracay Island while Indonesia saw higher volcanic activities (earthquake in Lombok, tsunami in Palu). Nonetheless, AirAsia’s reported 3Q18 net profit came in strong at RM916m on forex and disposal gains, and recognition of RM515m deferred tax assets following the completion of the sale and leaseback transactions on the aircrafts. AirAsia has declared a special dividend of 40 sen.

9M18 Core Net Profit of RM787m, Below Market and Our Expectations

Similarly, AirAsia’s 9M18 core net profit slipped by 8% yoy to RM787m on lower load factor, higher fuel costs and losses from associates. The results were below market and our expectations – 9M18 core net profit only account for 59% of street and 62% of our previous full year earnings forecasts.

Cutting EPS by 19-22%, Maintain BUY With a Lower TP

We have cut our FY18-20E EPS by 19-22%, imputing the weak 9M18 results as well as higher fuel price assumptions for 2019 (we expect Brent to hover between US$75-80/bbl). In tandem, we have lower our TP to RM3.20 based on an unchanged 10x 2019E PER. Maintain BUY. Our 12- month target price implied an upside of 7%, together with 40 sen dividend, the total expected return of 20% looks attractive. Key risks to our BUY rating – higher fuel costs, weaker tourism growth. This note marks the transfer of analyst coverage.

Source: Affin Hwang Research - 30 Nov 2018