AirAsia Group Berhad (AirAsia) reported a net loss of RM395m in 4Q18 due to higher fuel costs and the recognition of several one-offs (ie. fair value losses on derivatives, professional fees, provision for doubtful debt and staff severance package). The group’s 2018 core net profit of RM828m (-34% yoy) was below market and our expectations. Nonetheless, AirAsia has declared a higher than expected interim dividend of 12 sen. We trim our 2019-20E EPS by 10% after incorporating lower revenue growth and lower profit margins. In tandem, we have lowered our TP to RM2.86, based on an unchanged 10x 2019E target PER. Downgrade to HOLD (from Buy) on valuations.

An Unexpected RM395m Net Loss in 4Q18 Due to Fuel Cost, One-offs

Adjusting for exceptional items (ie. RM166m fair value losses on derivatives and RM70m forex gains), AirAsia’s 4Q18 core net loss of RM299m was below market and our expectations. Operationally, AirAsia carried more passengers in 4Q18 (+9% qoq) and registered a 2-ppt increase in load factor to 84%. However, its RASK growth of 0.8% (14.82 sen in 4Q18) has lagged the 16% qoq increase in CASK (to 16.58 sen), resulting in an operating loss of RM127m. The sharp increase in 4Q18 operating expenses was largely due to several one-offs such as: (i) RM146m expenses related to the BBAM transaction comprising the professional fees (RM101m), depreciation added back (RM29m) and accretion of finance cost (RM16m); (ii) write off of PT Indonesia AirAsia Extra lease payments of RM28m; (iii) provision for doubtful third party charter debts of RM60m; and (iv) staff severance package of RM44m.

2018 Core Net Profit Fell by 34% on Higher Fuel Cost, Higher Expenses

AirAsia’s 2018 revenue grew by 9% yoy to RM10.6bn, driven by 13% increase in passengers carried. However, its 2018 load factor slipped by 3ppt to 85% and RASK fell by 3% yoy to 14.74 sen due to its aggressive capacity expansion (+18% yoy) and subdued market conditions. The results were below market and our expectations – its 2018 core net profit of RM828m (-34% yoy) only accounted for 63% of street and 82% of our full year forecasts. Management has declared a 12 sen interim dividend in 4Q18, coupled with a special dividend of 40 sen, AirAsia 2018 full year DPS of 52 sen is ahead of our forecasts.

Source: Affin Hwang Research - 28 Feb 2019