CAPITALA’s 1HFY22 results disappointed as the rebound in air travel fell short of expectations. While we share its optimism that the recovery in air travel will further accelerate from 2H 2022, the clock is ticking on a more viable and holistic regularisation plan to lift it out of the PN17 status. We widen our FY22F loss by 36% and reduce our FY23F net profit by 44%. Our TP is lowered to RM0.60 (from RM0.65). Reiterate MARKET PERFORM.

1HFY22 core net loss came in wider-than-expected at RM1.4b, against our full-year loss forecast of RM1.6b and the full-year consensus loss estimates of RM1.4bn. The variance against our forecast came largely from a rebound in air travel that fell short of expectations.

1HFY22 revenue rose 2-fold from both airlines and digital businesses as travel restrictions were relaxed across the region. Airlines revenue rose >200% underpinned by 81% load factor with 4-fold increase in passengers carried boosted by higher ASK (+>100%) and RASK (+16%). The group introduced additional capacity of >100% YoY to support the surge in demand following further relaxation of travel protocols, domestically in Malaysia, Indonesia and the Philippines. AirAsia Malaysia’s number of passengers carried and capacity improved by 6-fold due to low base effect on the back of the resumption of a significant increase in number of additional domestic flights, and the relaunch of numerous domestic routes to connect people between major cities. AirAsia Indonesia achieved a much-improved load factor of 76% (+10ppts) due to pent-up demand between Jakarta and Denpasar, and Jakarta and Medan. AirAsia Philippines continued to record the group’s highest load factor at 89% (+13ppts). Airasia Super app revenue rose 257% due to low base effect driven by continued resurgence of travel demand. As a result, the average monthly active users (MAU) was at 10.6m (+>100% YoY), rising across all markets due to travel picking up. Bigpay’s user base grew 61% and revenue jumped 28% led by continued growth in both payments and remittance businesses. Teleport’s revenue grew 54% due to higher volume deliveries. All in, the group’s EBITDA loss narrowed in 1HFY22 due to better performances from airlines and Super app. This brings 1HFY22 core net loss to RM1.4bm compared to RM1.3b in 1HFY21 no thanks to higher losses in airlines as RASK (18.0 sen) came in lower than CASK (31.0 sen) due to higher jet fuel cost (+58%).

Outlook. CAPITALA expects its passenger demand to continue to rise in 2H 2022, judging from the encouraging load factors recorded at 159 international routes relaunched in 2Q 2022. In August, AirAsia operated 108 aircrafts and will operate 160 by end of the year. Its digital segment is expected to remain loss- making. Airasia Super App is expected to grow, underpinned by the continued resurgence of travel demand from borders reopening and tactical campaigns, alongside expected growth from airasia Food, Ride and Xpress. Additionally, Teleport is expected to continue expanding throughout 2022 as it adds new international lanes and delivery hubs. BigPay has also launched its digital lending platform to provide new loan products.

While we share its optimism that the recovery in air travel will further accelerate from 2H 2022, the clock is ticking on a more viable and holistic regularisation plan to lift it out of the PN17 status. We widen our FY22F loss by 36% to RM2.1b and reduce our FY23F net profit by 44% as we tone down our passenger growth assumptions. We lower our TP by 8% to RM0.60 (from RM0.65). While we reduce the valuation of its airline operations (to reflect our earnings downgrade and the recent multiple de-rating of airlines globally), we for the first time put a value to its digital assets (see our SoP table on Page 3). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3 again). Reiterate MARKET PERFORM.

Risks to our recommendation include: (i) the recovery in air travel stalls amidst a global recession, (ii) sustained high jet fuel prices, rendering air travel, especially low-cost air travel unaffordable, (iii) CAPITALA’s inability to lift itself out of the PN17 status, and (iv) persistent cash burn at its digital assets.

Source: Kenanga Research - 29 Aug 2022