AirAsia Group Berhad (AirAsia) reported a weak set of earnings: 6M19 headline net profit of RM113m was sharply lower yoy due to the absence of one-off gains, tough operating environment in the Malaysia and Thailand markets, and higher maintenance costs arising from the sale-and-leaseback of aircrafts. Overall, the results were below the market and our expectations. We cut our 2019-21E core EPS by 21-24% after incorporating lower a RASK assumption and higher maintenance costs. In tandem, we have lowered our TP to RM1.87, based on an unchanged 10x 2020E target PER (our previous TP of RM3.35 included a 90 sen special dividend). We downgrade our call to HOLD (from Buy) as valuation is fair while operating environment is challenging.

Weak 6M19 Core Earnings on Stiff Competition and Higher Costs

AirAsia reported a disappointing set of results – 6M19 core net profit fell by 74% yoy to RM163m due to: (i) stiff price competition in the Malaysian market; (ii) challenging operating environment in Thailand due to low Chinese tourist arrivals; (iii) higher operating costs (including maintenance) due to the sale-and-lease-back of aircrafts; and (iv) higher costs for its RedBeat Ventures. These negatives were partly cushioned by improved earnings in Philippines and Indonesia, as well as the recognition of RM141m of deferred tax assets. Adding in several one-offs (ie. RM147m share of losses from AirAsia India, RM106m gains from forex and derivative), the group’s 6M19 headline net profit came in at RM113m. All in, the results were below market and our expectations – AirAsia’s 6M19 core net profit only accounted for 24% of the street and our previous full-year forecasts.

2Q19 Load Factor Was Solid But Competition Had Affected RASKs

In 2Q19, AirAsia has 146 units of aircrafts, a 22% increase from 124 units in 2Q18. The higher number of aircrafts translated to a 19% yoy increase in seat capacity and a 17% increase in ASK. While the management did a commendable job in filling up the planes (2Q19 load factor at 85%, versus 86% in 2Q18), the higher supply of seats, coupled with competition from peers has capped AirAsia’s RASK (revenue per ASK) growth at 4% yoy, which lagged the 15% growth in CASK (cost per ASK). We note that the higher maintenance costs (+105% yoy) arising from accounting treatment for the aircrafts under sales and leaseback arrangements also contributed to the hike in CASK. All in, we expect the tough operating environment to persist in 3Q19, before subsiding in 4Q19.

Source: Affin Hwang Research - 29 Aug 2019