AirAsia reported a lower 1Q19 core pretax profit of RM112m (-64% yoy) due to higher expenses related to the leasing of more aircrafts and accounting impact from the adoption of MFRS 16 (Lease). The group’s 1Q19 reported net profit of RM96m was sharply lower than RM1.14bn reported in 1Q18 due to the absence of disposal gains. While the results were below street and our forecasts, AirAsia has declared an unexpected special dividend of 90 sen. We cut our 2019-21E core EPS by 24-30% but raised our TP to RM3.35 (from RM2.86), based on sum of the 90 sen special dividend and ex-dividend fair value of RM2.45, pegging the group at 10x 2020E EPS. Upgrade to BUY for the generous dividend, solid operating performance and the bright prospects of its digital business.

Lower 1Q19 Core PBT of RM112m (-64% Yoy), Below Expectations

AirAsia’s 1Q19 core pretax profit fell by 64% yoy to RM111.6m due to: (i) additional leasing expenses in relation to the leaseback of 79 aircrafts from BBAM Ltd Partnership; (ii) higher maintenance and overhaul expenses (different accounting treatment for major overhaul cost for leased aircraft and owned aircrafts); and (iii) negative impact from the adoption of MFRS 16 (Fig 2). Elsewhere, the group’s 1Q19 revenue of RM2.78bn (+8.8% yoy) reflected its capacity growth and high load factor, while the other key costs (staff cost, fuel expenses) had trended higher, tracking the growth in ASK (Available Seat Kilometres). High deferred tax of RM108.8m has dragged AirAsia into a core net loss of RM6.6m in 1Q19. Overall, the results were below market and our expectations. The earnings miss was due to higher overhaul expenses and the adoption of MFRS 16.

Generous Special Dividend of 90 Sen

Despite the weak earnings, the Board has declared a special dividend of 90 sen, payable on 29 August 2019. The special dividend payout of RM3bn is to be funded via cash in hand (RM2.94bn as at end-March 2019), proceeds from the ongoing sales of aircrafts to Castlelake L.P and its planned disposal of an additional 19 aircrafts (details has yet to be announced). The adoption of MFRS 16 (Lease) and AirAsia’s aircraft monetisation initiatives has resulted in higher gross borrowings of RM11bn as at end March 2019, of which, RM10.1bn are lease liabilities and balance (RM934.8m) are conventional / Islamic borrowings. While we estimate the special dividend to lift AirAsia’s net gearing ratio to 3.1x (from 1.2x currently), we are not overly concerned as most of the group’s borrowings are lease liabilities with no loan covenants.

Source: Affin Hwang Research - 30 May 2019