Results’ highlights. YoY, 3QFY19 revenue for the airline business grew 17%, mainly attributed to higher passengers volume (+20%) and a 1% increase in RASK. All in, capacity grew across the board including Malaysia (+10%), IAA (+10%) and PAA (+19%). Unit Passenger Revenue grew 1% for IAA, 3% for PAA while MAA showed a reduction of 5%. However, CASK rose faster by 11% due to higher staff costs, provisions for maintenance and overhaul (+>100%), user charges and other operating expenses, due to the increase in operations, as well as the impact of adopting MFRS16. Overall ancillary income rose 26% (accounts for 23% of total revenue) underpinned by seat selection (+25%), baggage (+20%), and duty free sales (+39%). However, 3QFY19 suffered a pre-tax loss of RM347m compared to a pre-tax profit of RM309m in 3QFY18 due to: (i) stiff price competition in the Thailand and Malaysian markets leading to lower domestic fares (- 15%), (ii) losses at TAA and AAJ (associates) totalling RM61.8m, and (iii) the adoption of MFRS 16, and sale and leaseback programme which drove maintenance and overhaul cost up by 118%. All these sent 3QFY19 CNP lower by 90%.

YoY 9MFY19 core net profit came in at RM247m fell sharply compared to RM1.3b in 9MFY18 due to: (i) stiff price competition in the Malaysian market, (ii) challenging operating environment in Thailand and India due to low pricing by competitors and higher CASK, respectively, (iii) sale and leaseback programme which requires AirAsia to make provisions or expense off maintenance provisions rather than capitalise and amortise over the useful life of the major overhaul, and (iv) the adoption of MFRS 16 requiring operating leases to be capitalised on the balance sheet, with the right-of-use assets depreciated and interest expense recognised.

Outlook. The group expect load factors and fares for the rest of 2019 to remain strong in a seasonally strong period. However, we expect tough operating environment to persist, no thanks to high maintenance cost due to accounting treatment for aircrafts under sales and leaseback arrangements and competitive pressure in Malaysia and Thailand. Teleport (logistics business) is expected to see encouraging growth due to efforts to seek tie-ups with different airlines, as well as SMEs. The group will continue its focus on digital initiatives i.e. AirAsia.com is being developed as a full-fledged one-stop travel and lifestyle platform whilst BigPay will be rolled out in multiple markets in ASEAN.

Reiterate MP. Our TP is RM1.70 based on 10x FY20E EPS (+0.5SD above 5-year historical forward mean), which is at a discount to average forward PER of 11x of global peers like Ryanair and Southwest Airlines to reflect AirAsia’s relatively smaller market capitalization.

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

Source: Kenanga Research - 28 Nov 2019