1H18 CNP of RM645.7m makes up 43%/45% of our/consensus full-year estimates. We deem 1H18’s performance as inline as we are expecting a seasonally stronger 2H18. No dividend declared for the quarter, as expected. No changes to FY18-19E core earnings. Reiterate OUTPERFORM with an unchanged SoP-driven Target Price of RM4.80.

In line. 1H18 CNP of RM645.7m (after stripping-off; forex gain: RM16.9m, disposal gains: RM414.0m, re-measurement gain: RM534.7m and Derivatives loss: RM57.4m) makes up 43%/45% of our/consensus full-year estimates. We deem the 1H18’s performance to be in line as we are expecting a seasonally stronger 2H18. No dividend declared for the quarter, as expected.

Results highlight. 1H18 revenue grew 12%, YoY driven by a higher capacity whereby its Available Seat Kilometres (ASK) increased 18% due to addition of aircrafts. However, 1H18 CNP came off by 28% driven by the decrease in Revenue/ASK (-2%) coupled with the increase in Cost/ASK (+2%). We note that the decrease in Revenue/ASK was affected by lower average fare of RM171.4/pax (- 2%), while the increase in Cost/ASK was mainly due to higher fuel cost which increased by 27%. QoQ-wise, 2Q18 CNP came off by 20% which was mainly impacted by higher fuel cost (+7%), coupled with loss contribution from its associates due to intense competition in the region.

Outlook. Moving forward, management emphasised on cost reduction measures as one of the top priorities and actively reducing their staff numbers through automation as well as route rationalisation by reducing/terminating unprofitable routes. While management remains in high spirit that a lower PSC from airports would further lower their operational cost, we are less optimistic as we are still waiting the outcome from the PSC study conducted by MAVCOM. Apart from cost rationalisation, management are also looking to revise its average fares upwards and maintains a load factor target of 85%.

Earnings estimates. Post results, there are no changes to our FY18- 19E core earnings as we are anticipating a strong 2H18 performance, especially in 4Q18.

Reiterate OP but with SoP-derived TP of RM4.80 pegged to 9.0x FY18E PER (4-year average) on its core earnings, coupled with RM0.78/share special dividend. We deem our 9.0x FY18E PER on their core business (pegged at 4-year average) fair given; (i) AIRASIA’s much healthier net gearing post AAC disposal coupled with further asset monetization plans from Santan/Red Cargo/Expedia to honor their intention for special dividends every two years, (ii) the increased focus on higher turnaround domestic routes on the back of weak competition from other domestic airlines, and (iii) strong growth potential on the back of an expanding capacity. We foresee immediate- term catalyst from the finalization of special dividends (anticipating RM0.78) from the recent sale of AAC back in March, which management is hoping to declare in 3Q18.

Risks include lower-than-expected load factors and higher-than- expected fuel costs, and higher-than-expected operating costs.

Source: Kenanga Research - 03 Sep 2018