AirAsia Group (AirAsia) reported a disappointing set of earnings: 9M19 headline net profit of RM81m was sharply lower yoy due to the absence of one-off gains, tough operating environment, higher maintenance costs arising from the sale-and-leaseback of aircrafts and hefty forex / derivative losses. Overall, the results were below market and our expectations. We cut our 2019-21E core EPS by 31- 96% after incorporating lower load / RASK assumptions and higher costs projections. We switch our valuation method to 1.05x book value (from 10x 2020E PER) and lower our price target to RM1.66. Maintain HOLD. Though its 2020E earnings is likely lacklustre, we expect AirAsia to weather through the difficult market, driven by its strong management and operational efficiencies.

Weak 9M19 Earnings Due to Stiff Competition and Higher Costs

AirAsia reported a weak set of results – 9M19 core pretax profit fell by 91% yoy to RM64m due to: (i) stiff price competition in the Malaysian market; (ii) challenging operating environment in Thailand; (iii) higher operating costs due to the sale-and-lease-back of aircrafts; and (iv) higher losses at BigPay and AirAsia.com. These negatives were partly cushioned by improved earnings in the Philippines and Indonesia. Adding in the one-offs (RM147m share of losses from AirAsia India, RM234m losses from forex / derivative and RM542m deferred tax asset arising from the sales and leaseback transaction), the group’s 9M19 headline net profit came in at RM81m.

9M19 Results Below Expectations

All in, the results were below market and our expectations – AirAsia’s 9M19 net profit only accounted for 20% of street and 15% of our previous full-year forecasts. The earnings miss was due to lower than expected load factor, weak growth in RASK and high depreciation / finance cost related to the operating leases.

Capacity Growth and Competition Affect Load Factor, RASK

In 3Q19, AirAsia had 147 units of aircrafts, a 23% increase from the 124 units in 3Q18. The higher number of aircrafts translated to a 22% yoy increase in seat capacity and a 19% increase in ASK. As a result of the sharp growth in capacity, AirAsia’s load factor slipped by 2bps to 84% (from 86% in 3Q18) while RASK grew by a mere 1%, which lagged the 11% growth in CASK (cost per ASK).

Cutting Our 2019-21E Core EPS by 31-96%,

We cut our 2019-21E earnings by 31-96%, incorporating: (i) the weak 9M19 financial results; (ii) weaker RASK growth due to stiff competition in the Malaysia market; (iii) lower load factor; (iv) higher operating costs for its nonairline businesses; and (v) higher depreciation and finance costs related to the operating leases.

Maintain HOLD With a Lower Price Target of RM1.66

In view of the challenging business condition and volatile quarterly earnings swing, we believe that price-to-book is a better valuation method, vis-à-vis PER based valuation. We cut our 12-month price target to RM1.66 (from RM1.91) based on 1.05x 2020E book value (-1 standard deviation from 10- year average). Maintain HOLD. While AirAsia’s 2020E earnings is likely lacklustre, we expect AirAsia to weather through the difficult market, driven by its strong management and operational efficiencies. Key upside risks are: (i) sharp decline in crude oil price; (ii) higher-than-expected growth in RASK. Downside risks are higher oil price and weaker load factor.

Source: Affin Hwang Research - 28 Nov 2019