9M18 CNP of RM806.3m makes up 63%/58% of our/consensus full-year estimates. We deem the performance broadly within expectations as we are expecting a strong fourth quarter. A 40.0 sen special dividend was declared, below our expectation of 78.0 sen. No changes to FY18-19E core earnings. Reiterate OUTPERFORM with a lower Target Price of RM3.25 (from RM4.05).

Broadly within. 9M18 CNP of RM806.3m makes up 63%/58% of our/consensus full-year estimates. We deem the performance broadly within expectations as we are expecting a strong fourth quarter which is their strongest quarter attributable to the year-end holiday season. A 40.0 sen special dividend was declared, below our expectation as we were expecting a higher special dividend of 78.0 sen from the gain on disposal of its leasing arm.

Results highlight. 9M18 CNP dropped by 34% despite its revenue growing 10%, YoY. The decline in 9M18 CNP is mainly due to the compression in operating margin to 13% (-7ppt). Its 9M18 Cost/ASK (including jet fuel) increased by 4%, mainly driven by higher fuel cost which rose by 35%; this is on the back of capacity increasing by 17% which is a commendable effort by management. To recap, cost reduction measure was one of management’s top on-going priorities. QoQ, 3Q19 CNP was down by 44%, attributable to: (i) higher fuel cost environment, ii) higher interest cost (+13%), (iii) higher effective tax rate of 6% (from 3%), and iv) the weak performance from its other associates, i.e. Indonesia and Thailand that were hit by a series of incidents.

Outlook. Going forward, management is still pursuing their expansion plan to grow their market share while its competitors are scaling back capacity. They are also hopeful that its Philippines and Indonesia operations will turn around by 2019. As for fuel hedging, management hedged Brent as follow; 1Q19: 48% at USD67.24bbl, 2Q19: 27% at USD65.40bbl. On its digital transformation front, they are actively engaging with their partners, i.e. Google, Airbus (Skywise) & Palantir to integrate machine learning to their Big Data platform to improve airline operations, which would lead to cost savings in the future. On the recent departure levy announced in Budget 2019, management is confident that they can persuade the government to lower or abort the proposed departure levy on views that it would affect travel sentiment.

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

Reiterate OP but with a lower TP of RM3.25 (from RM4.05) pegged to 9.0x FY18E PER (4-year average) on its core earnings. 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, (iii) strong growth potential on the back of an expanding capacity, and iv) lower fuel cost environment.

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

Source: Kenanga Research - 30 Nov 2018