CAPITALA’s 1HFY23 results met expectations. Its 1HFY23 core net loss narrowed significantly YoY to RM112m underpinned by the strong recovery in air travel. It will unveil its PN17 regularisation plan by Oct 2023. We maintain our forecasts and TP of RM0.84 but downgrade our call to UNDERPERFORM from MARKET PERFORM as its valuation is now fair after the strong run-up in its share price.

It reported a core net loss of RM112m in 1HFY23, against our full-year net profit forecast of RM201m and the full-year consensus net profit estimate of RM242m. However, we consider the results within expectations as we expect earnings momentum to escalate in 2H as air travel continues to normalise.

Its 1HFY23 revenue rose two-fold in both airlines and digital segments. Airlines revenue rose 3-fold underpinned by 87% load factor with a 111% increase in passengers to 19.6m (about 83% of pre-COVID) boosted by higher ASK (+>100%) and RPK (>100%). In 1HFY23, the group activated 165 aircrafts which saw robust travel demand resulting in strong passenger throughput. AirAsia Malaysia achieved a load factor of 87% (75% of pre-pandemic level). AirAsia Indonesia achieved a healthy load factor of 84% (+7ppts YoY) due to pent-up demand between Singapore and Denpasar, and Jakarta and Singapore. Similarly, AirAsia Philippines’s seat capacity and passengers carried recovered to between 83% and 89% of pre-pandemic levels leading to load factor of 90%, which together with AirAsia Thailand recorded the highest load factor of 90% (+14ppts YoY). Notably, China’s routes achieved an astounding load factor of 90%.

In the digital segment, Airasia Super app revenue rose >100% driven by the strong revival of domestic and international travel demand in most regions. As a result, the average monthly active users (MAU) was at 15m (+40% YoY), rising across all markets as travelling activities picked up. Bigpay’s revenue jumped 55%, led by continued growth in both payments and remittances. Teleport’s revenue rose 70% driven by growth from existing and onboarding of new customers, reactivation of AirAsia fleet, and additional capacity from third party airlines allowing expansion into new lanes beyond AirAsia’s network. All in, EBITDA came in at RM964m against a loss of RM200m in 1HFY22 due to better performance from airlines. Fuel charges partly mitigated the high fuel costs and supported the improvement in EBITDA in 1HFY23. This brings 1HFY23 core net loss to RM112m compared to a loss of RM1.8b in 1HFY22 thanks to profits in airlines as RASK (+2%) came in higher than CASK (-33%) due to higher average fares (+19%).

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

1. It is on track to announce PN17 regularisation plan by Oct 2023 with completion expected by end-4QCY23. We gathered that it plans to divest its aviation group to AirAsia X in exchange of shares to be distributed back to its shareholders.

2. The group reiterated that the passenger throughput recovery is gaining traction. It has reactivated 175 aircrafts in 1HCY23 with plans to reallocate aircraft to operating countries that have stronger demand. By end of 2023, the group is targeting to have all its 200 aircrafts deployed to cater for the rising demand. In addition to fleet reactivation, it expects further upside from the current high yield environment. Specifically, the group anticipate fares to pick up in the 2HCY23 and peak in 4QCY2023. In 2QCY23, fares are at 15% higher than pre-Covid levels in 2QCY19,

3. In an effort to capitalise from the reopening of the China market in March 2023, both AirAsia Malaysia and AirAsia Thailand, which have previously enjoyed considerable financial benefits from China routes, have been prioritising deploying capacity to China to capitalise on the pent-up demand. The group expects the high fares to persist. As such, the strategy is to deploy and reactivate more aircraft in order to remove dead costs and improve the overall financial position.

4. For the Group’s digital businesses, the recent induction of Teleport’s first A321 Freighter 'Awan' to Teleport’s fleet in July has added additional logistics capabilities and targeted capacity to Teleport’s network in Southeast Asia allowing Teleport to connect Southeast Asia to China, Vietnam and India even better. Through the Capital A and AirAsia airline ecosystem, the A321 freighter has best-in-class unit costs that extend Teleport’s value proposition further. Teleport’s growth rate will accelerate in the second half of 2023 with the introduction of two additional A321 freighters, the continued return to service of AirAsia’s fleet and the addition of third-party airline connectivity via strategic partnerships that serve Teleport's 1,500 growing customer base faster, cheaper and simpler than any competitors.

Forecasts. Maintained.

We also keep our SoP-TP of RM0.84 (see below). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). We downgrade our call to UNDERPERFORM from MARKET PERFORM after the recent strong run-up in its share price.

Outlook. Looking farther into CY23, we project CAPITALA’s system-wide revenue seat km (RPK) to grow 79% to 43b in FY23, after recovering by 20b to 24b in FY22. CAPITALA expects its passenger demand to continue to rise moving farther into 2023, judging from the encouraging load factors recorded at 159 international routes. The group has reactivated 157 aircrafts in 1QCY23 with plans in place to reallocate aircraft to operating countries that has stronger demand. By end of 2023, the group is targeting to have all its 215 aircrafts deployed to cater for the rising demand. 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 CAPITALA 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 steer it out of the current financial difficulty. However, we are mindful of it still being under the PN17 status.

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 - 30 Aug 2023