1Q19 CNP of RM112.7m makes up 15%/12% of our/consensus full-year expectations. However, we would deem the results to be broadly in line, as we expect stronger performance in subsequent quarters due to expanded capacity and seasonality. Positively, an unexpected special dividend of 90.0 sen was declared, funded by disposal of aircrafts. No changes to FY19-20E earnings. Upgrade to OP with higher TP of RM2.20.

Within expectations. 1Q19 CNP of RM112.7m makes up 15%/12% of our/consensus full-year expectations. However, we deem the results to be broadly in line, as we expect stronger performance in subsequent quarters due to expanded capacity and seasonality. Positively, an unexpected special dividend of 90.0 sen was declared, funded by disposal of aircrafts.

Results highlight. YoY, 1Q19 CNP dropped sharply by 69% despite revenue growing 9%. The decline in FY18 CNP was mainly due to the compression in operating margin to 9% (-5ppt), and higher net interest expense. For 1Q19, its average fare was down by 2% to RM166.9/pax while its Cost/Ask-ex fuel increased by 13% which we believe was driven by higher costs like user fees, maintenance fees and staff costs.

QoQ, 1Q19 revenue is flattish (+1%) but it managed to register CNP of RM112.7m compared to CNL of RM219.1m in 4Q18 due to lower fuel cost (-14%).

Outlook. For FY19, management is looking at net addition of 18 aircrafts in their bid to grow market share, and remain hopeful that markets like Indonesia will see further improvements. On its digital transformation front, they are actively engaging with their partners, i.e. Google, Airbus (Skywise) & Palantir, to integrate machine-learning into their Big Data platform to improve airline operations. This would lead to cost savings in the future via automation, which leading to rationalisations,lisations which is part of the company’s direction.

Earnings estimates are unchanged. Upgrade to OUTPERFORM with a higher Target Price of RM2.20 (from RM1.95) which includes 9.0x FY20E PER (4-year average) on its core earnings as we roll forward from FY19E. We deem our 9.0x FY20E PER on their core business (pegged at 4-year average) fair given AIRASIA’s much healthier net gearing post AAC di our call posal. Hence, our upgrade to OUTPERFORM (previously, UNDERPERFORM) backed by its generous special dividend of 90.0 sen.

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

Source: Kenanga Research - 30 May 2019