CAPITALA’s FY22 core net loss came in within our forecast but wider than consensus loss estimate. We share its optimism that the recovery in air travel will accelerate moving into 2023. It is slated to unveil its PN17 regularisation plans in mid-April. We keep our FY23F net profit but raise our TP by 12% to RM0.67 (from RM0.60) as we roll forward our valuation base year to FY24F (from FY23F). Reiterate MARKET PERFORM.

FY22 core net loss of RM3.1b came within our net loss forecast of RM3.0b but wider than consensus loss estimate of RM2.3bn.

FY22 revenue rose 3-fold in both its airlines and digital businesses. Airlines revenue rose >200% underpinned by 84% load factor with a 400% increase in passengers to 24.2m (46% of pre-COVID) boosted by higher ASK (+>100%) and RPK (>100%). The group introduced additional capacity by >100% YoY to support the surge in demand following further relaxation of travel protocols, domestically in Malaysia, Indonesia and the Philippines. For FY22, AirAsia Malaysia successfully achieved a pre-Covid load factor of 84% while carrying 48% of FY19 passengers at 16.8m. AirAsia Indonesia achieved a much-improved load factor of 79% (+15ppts) 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% (+9ppts). In the digital segment, Airasia Super app revenue rose 8-fold due to low base effect driven by continued resurgence of travel demand. As a result, the average monthly active users (MAU) was at 43m (+>100% YoY), rising across all markets due to travelling activities picking up. Bigpay’s user base grew 27% and revenue jumped 48% led by continued growth in both payments and remittance businesses. Teleport’s revenue fell 11% due to declining cargo volume. All in, the group’s EBITDA loss narrowed in FY22 due to better performances from airlines and Super app. This brings FY22 core net loss to RM3.1b compared to RM3.0b in FY21, no thanks to losses in airlines as RASK (21.0 sen) came in lower than CASK (28.0 sen) due to higher jet fuel cost (+43%).

The key takeaways from the analysts briefing yesterday are as follows:

1. The group plans to announce the details of its PN17 regularisation plan by mid-April 2023 with completion expected by end-3Q 2023. We gathered that the group plans to divest its aviation group to AirAsia X in exchange of shares for subsequent distribution to its shareholders.

2. The group reiterated that the passenger throughput recovery is gaining traction. In Nov 2022, the group operated 125 aircrafts (about 60% of 4 airlines fleet size) and is currently targeting to reactivate 150 operational aircrafts by March-2023 and expect entire fleet of 204 A320 aircrafts and one A330 in AirAsia Malaysia to return to service by 3Q 2023. By end Nov 2022, it would have resumed 86% and 60% of pre-pandemic domestic and international capacity, respectively, by utilising 124 aircrafts.

3. It has commenced commercial flight (Kuala Lumpur-Guangzhou) in Feb 2023 with a 100% load factor. AirAsia Malaysia and AirAsia Thailand have the strongest recovery, 92% load factor in February 2023 and expect continued high load as capacity is gradually restored. The group is targeting to recover 90% of pre-pandemic capacity or 290 weekly flights by August 2023 and plans to operate 363 weekly flights by November 2023.

4. For the Group’s digital businesses, airasia Super App in 2023 will realign its focus back on travel verticals in tandem with the recovery in travel demand. The latest partnership with Archipelago International is expected to drive up transaction numbers as the platform strengthens its hotels inventory alongside onboarding more direct airlines for its flights inventory. Additionally, the launch of Community will boost engagement among users through its messaging service, airasia chat and mobile gifting, airasia gifts.

Outlook. Looking into 2023, we project CAPITALA’s system-wide revenue seat km (RPK) to grow 52% to 35b in FY23, after recovering by 19b to 23b in FY22 based on our forecasts. CAPITALA expects its passenger demand to continue to rise moving into 2023, judging from the encouraging load factors recorded at 159 international routes relaunched in 2Q 2022. In Nov 2022, the group already operated 125 aircrafts and is currently targeting to get 140 operational aircrafts by end-2022 and expect to reach full fleet utilisation by 2QCY23. By end-Nov 2022, it would have resumed 86% and 60% of pre-pandemic domestic and international capacity, respectively, by utilising 124 aircrafts. 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 2023 as it adds new international lanes and delivery hubs. BigPay has also launched its digital lending platform to provide new loan products.

We continue to like CAPITAL A for: (i) it being a beneficiary to the recovery in air travel as the pandemic comes to an end, (ii) its growing digital business, leveraging on its strong AirAsia brand and AirAsia’s existing client base, and (iii) its dynamic and visionary leadership that should help to steer it out of the current financial difficulty. However, we are mindful of it still being under the PN17 status.

We introduce FY24F numbers and roll forward our valuation base from FY23F to FY24F. Consequently, our SoP-TP is raised by 12% from of RM0.60 to RM0.67 (see below). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). 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 - 1 Mar 2023