FY19 Core Net Loss (CNL) came in at RM159m, below expectations compared to our/consensus net profit estimates of RM396m/RM98m. The variance from our forecast was due to lower-than-expected load factor. We forecast a loss in FY20 due to travel disruptions caused by the spread of the coronavirus, and potentially lower ticket prices which are likely to drag down yields. TP is cut from RM1.33 to RM1.00. Downgrade from Market Perform to Underperform.

Results’ highlights. YoY, 4QFY19 revenue for the airline business grew 9%, mainly attributed to higher passenger volume (+9%) and a 9% increase in RASK. All in, capacity grew across the board including Malaysia (+4%), IAA (+30%) and PAA (+21%). The increase in capacity resulted in a drop in load factor of 2ppt from 84% to 82%. Average Fare grew by 18% in IAA whilst Malaysia recorded a modest 9% growth. Unit Passenger Revenue grew 1% for IAA, 3% for PAA while MAA showed a reduction of 5%. However, RASK rose faster by 9% compared to a lower RASK (-1.3%) due to better average fare (+11%) and lower fuel price (-9%). Overall ancillary income rose 16%, underpinned by seat selection (+24%) and baggage (+17%). 4QFY19 suffered a narrower pre-tax loss of RM232m compared to a loss of RM371m in 4QFY18 due largely to: (i) better average fare (+11%) and (ii) narrower losses at India and Indonesia; and (iii) AirAsia Philippines turned profitable. No dividend was declared in this quarter.

YoY FY19 CNL of RM158m was 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.

Cut our FY20E assumptions and hence forecast a net loss of RM258m instead of RM556m profit. We cut our load factor assumption from 84% to 79%, in line with management’s guidance of averaging 78% in 1H 2020 due to lower demand as a result of the coronavirus.

Outlook. Overall, we expect tough operating environment derailed by widespread travel disruptions due to the coronavirus, and potentially lower ticket prices which is likely to drag down yields. Elsewhere, we expect maintenance cost to remain high due to accounting treatment for aircrafts under sales and leaseback arrangements.

Downgrade from MP to UP. We are using PBV methodology due to the uncertain and volatile quarterly earnings ahead. TP is cut from RM1.33 to RM1.00 based on 0.8x FY20E BVPS (slightly below 5-year historical forward mean) (from previously 8x PER). The stock is expected to be further de-rated due to concerns over the coronavirus outbreak which could prolong the soft propensity for air travel in the region and particular impacting AirAsia.

Risks include higher-than-expected RASK and better-than-expected load factor.

Source: Kenanga Research - 28 Feb 2020