FY18 CNP of RM587.2m came in below expectations, making up 45%/44% of our/consensus full-year estimates. The negative variance stems from; (i) higher-than-expected losses from associate, and (ii) a sharp increase in maintenance cost & other costs. A 12.0 sen dividend was declared, bringing the full-year dividends to 65.0 sen, above our expectations of 53.0 sen. Slashed FY19E CNP by 43%. Downgrade to UP with a lower TP of RM1.95 (previously, OP; TP: RM3.25).

Below expectations. FY18 CNP of RM587.2m came in sharply below expectations, making up 45%/44% of our/consensus full-year estimates. The negative variance stems from; (i) higher-than-expected losses from associate, and (ii) a sharp increase in maintenance cost and other costs. A 12.0 sen dividend was declared, bringing the full- year dividends to 65.0 sen, above our expectations of 53.0 sen.

Results highlight. FY18 CNP dropped sharply by 61% despite revenue growing 9%, YoY. The decline in FY18 CNP was mainly due to the compression in operating margin to 8% (-12ppt), coupled with the loss contributions of from its associate. For FY18, its average fare was down by 2% to RM172.2/pax while its Cost/Ask-ex fuel increased by 6% which we believe was driven by higher costs like user fees, maintenance fees and other costs, which saw an increase by 23-66%. QoQ, AIRASIA grew its revenue steadily by 9% in 4Q18. However, they registered CNL of RM219.1m compared to CNP of RM160.6m in 3Q18 due to sharp escalation in operating costs which increased by 41%. The sharp increase in cost is driven by an escalated maintenance fee (+291%), other costs (+153%), user charges (+28%) and staff cost (+22%).

Outlook. Going forward, management is still planning to add 22 aircrafts in 2019 in their bid to grow market share, while remaining hopeful that markets like Indonesia will improve from the recent natural disasters. As for fuel hedging, management hedged Brent as follow; FY19: 52% at USD63.41bbl. 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, which management intends to further rationalise its headcount through automation.

Earnings estimates. Following its unexpectedly weak results, we slashed our FY19E CNP by 43% as we have factored in higher costs like maintenance, user fees, and other costs. That said, we also introduce our FY20E CNP of RM815m.

Downgrade to UP with a lower TP of RM1.95 (from OP and TP of RM3.25) pegged to an unchanged 9.0x FY19E 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, and (ii) earnings volatility may cap further valuation re-rating beyond its mean valuation.

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

Source: Kenanga Research - 28 Feb 2019