CAPITALA’s 9MFY23 results disappointed as the rebound in air travel fell short of expectations. We share its optimism that the recovery in air travel will further accelerate moving into 2024. It is unveiling its PN17 regularisation plan by end-2023. We now forecast a net loss of RM33m (from a profit previously) in FY23F but keep our TP of RM0.84 and MARKET PERFORM call.

It reported a core net loss of RM291m in 9MFY23, against our full-year net profit forecast of RM201m and the full-year consensus net profit estimate of RM155m. The variance against our forecast came largely from the rebound in air travel falling short of expectations.

Its 9MFY23 revenue rose 133% in both airlines and digital segments. Airlines revenue rose 2-fold underpinned by 88% load factor with passengers which doubled to 34.4m (about 85% of pre-COVID) boosted by higher ASK (+>100%) and RPK (>100%). In 9MFY23, the group activated 165 aircrafts as robust travel demand resulted in strong passenger throughput. AirAsia Malaysia achieved a load factor of 88% (about 80% of pre-pandemic level). AirAsia Indonesia achieved a healthy load factor of 85% (+6ppts 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 85% and 89% of pre-pandemic levels leading to load factor of 92%, which together with AirAsia Thailand recorded the highest load factor of 90% (+10ppts 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 (+61% YoY), rising across all markets as travelling activities picked up. Bigpay’s revenue jumped 51%, led by continued growth in both payments and remittances. Teleport’s revenue rose 43% 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 RM1.4b against a loss of RM127m in 9MFY22 due to better performance from airlines. Fuel charges partly mitigated the high fuel costs and supported the improvement in EBITDA in 9MFY23. This brings 9MFY23 core net loss to RM291m compared to a loss of RM3.1b in 9MFY22 thanks to lower CASK (-28%) which more than offset lower RASK (-6%).

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

1. It is on track to announce PN17 regularisation plan by end Dec 2023 with completion expected by 2QCY24. 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 is targeting to reactivate 187 aircraft by 4QFY23 with 161 aircraft available for operation and capacity to reach 74% of pre-COVID level, leveraging the high travel season and the newly established visa-free travel between China and Malaysia starting 1 Dec 2023. In addition to fleet re-activation, it expects further upside from the current high yield environment. Specifically, the group anticipate a strong 4QCY23 which is poised for revenue upswing in robust travel demand coupled with higher fares during the peak season.

3. On the digital front, the group is implementing effective cost-cutting measures, particularly in removing non-strategic lines of business. The team is now focusing on expanding its hotel inventory and enhancing conversion rates to significantly strengthen its presence in the hospitality sector. Its fintech BigPay’s strategic initiatives to reduce operating costs and improve performance are yielding positive results, reflected in the narrowing losses this quarter. Close collaborations with AirAsia and airasia MOVE are expected to further enhance sales in the upcoming quarters, along with its 2024 plans to expand its product offerings into new regional markets such as Indonesia, Thailand, and the Philippines.

Forecasts. We now forecast a loss of RM33m in FY23 as we cut our revenue seat km (RPK) to 59b from 65b. However, we keep our FY24F numbers.

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). Reiterate MARKET PERFORM.

Outlook. 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 165 aircrafts with plans in place to reallocate aircraft to operating countries that has stronger demand. By end of 2023, the group is targeting to have 187 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 post pandemic, (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 - 1 Dec 2023