CAPITALA's 9MFY24 results came in above expectations due to forex gains and a stronger-than-expected rebound in air travel boosted by higher yields. It reported a core net profit of RM1,094m in 9MFY24. We now forecast a profit of RM1,136m (previously loss of RM398m) in FY24. We increase our TP from RM0.78 to RM1.06 and maintain our MARKET PERFORM call. The proposal to dispose its aviation business has received shareholders' approval at the Extraordinary General Meeting (EGM) in mid-October, with aim to exit PN17 in 1QFY25.

It reported a 9MFY24 core net profit of RM1,094m, coming in above expectations due to forex gains (RM2.2b) and a stronger-than-expected rebound in air travel boosted by higher yields. The core net profit of RM1,094m came in against our full-year net loss forecast of RM398m and the full-year consensus net profit estimate of RM459m. The variance against our forecast came largely from the rebound in air travel exceeding expectations.

YoY, its 9MFY24 revenue more than doubled on improved performance from both its airlines and digital segments. For the airlines segment, AirAsia Malaysia, Thailand, Indonesia, and Philippines delivered improved performance across key metrics, with a system-wide load factor of 90%, reflecting a 2 ppts improvement. Passenger volume grew 36% to 47m (>80% of Pre-COVID) boosted by higher ASK (+35%). The growth was largely attributed to routes to China and India following visa-free travel implementation at the end of 2023 for China and India travellers. Additionally, both domestic and international segments are experiencing similar growth rates, indicating a holistic recovery across AirAsia's network. AirAsia Philippines and Thailand emerged as top performers, chalking the highest load factor of 91%. AirAsia Malaysia and Indonesia followed closely with an impressive load factor of 89% and 87%, respectively.

It registered a net profit of RM1,094m compared to a loss of RM769m due to forex gains (RM2.2b) and boosted by better performance from airlines as RASK (+16%) more than offset CASK (+4%).

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

1. To capitalise on the robust demand, the group is currently prioritising the active expansion of its capacity and network to meet growing demand. It reiterated that the passenger throughput recovery is gaining traction and anticipate recovery to 84% of its pre-Covid capacity. In 4QCY24, the group will further expand its fleet with the introduction of four new A321neo aircraft in Malaysia and one in Thailand, increasing total active aircraft to 205 out of 224. Additionally, it will launch 18 new routes, driving double-digit increases in capacity both domestically in Malaysia and Thailand, and on international sectors in Indonesia. This expansion is well-timed to capture the strong, sustained travel demand during peak periods in China and India, as well as the global year-end festivities, positioning it to capitalise on these market opportunities and fuel growth trajectory.
2. AirAsia MOVE under Move Digital is targeting to significantly extend its customer base beyond traditional AirAsia travelers and improve booking volumes, by launching high-impact regional campaigns in collaborations with AirAsia, and broadening partnerships with external airlines (Flybeyond). Additionally, the group is refining its integrated service offerings, such as linking hotel accommodations directly with flight bookings to boost awareness of the Flight and Hotel bundle savings.
3. At Capital A Aviation Services (CAPAS), the engineering arm ADE, hangar capacity was expanded from seven lines to 12 in 2QFY24, following the launch of the first six lines of its newly constructed 14-line MRO hangar in August. In 3QCY24, ADE completed 13 base maintenance checks, a slight decline compared to the prior year. In a strategic move to enhance its operational capabilities, ADE is transforming the existing two lines in Senai into a specialised paint hangar. This adjustment brings the total to 16 active lines by the end of the year. Concurrently, ADE has secured an additional plot of land with the capacity for 4 lines from Malaysia Airports Holdings Berhad (MAHB), with construction set to begin in 1QCY25. To enhance its marketplace, Aerotrade, ADE will continue to onboard more buyers and sellers, increasing its platform's diversity and reach, enabling clients access to a wider selection of high-quality, authentic parts directly from manufacturers.
4. Teleport expects to grow 2024 full-year revenue 50% YoY, driven by continued business acceleration in both cargo volumes and eCommerce parcels through the Teleport Network, and deliver higher operating profit through increasing returns to scale. Teleport expects 2024 to generate north of MYR1b in total revenues, a record milestone from its inception seven years ago. The success of 2024 so far has been delivering on four core strategies: First, growing wallet share with existing customers, by delivering greater market reach and improved service reliability from China to key markets including Asean, Oceania and the Middle East. Second, winning direct volumes from the top five eCommerce marketplaces in China by offering value-added end-to-end services, facilitating more parcel movements out of China to and through Asean and beyond. Thirdly, with the reliability of Teleport's three freighters resolved in early 3QCY24, building The Teleport Network by securing more belly and freighter capacity from over 40 partner airlines, especially to cater to the high peak demand to Oceania and the Middle East. Lastly, optimising end-to-end costs in areas including cargo terminals, and last-mile operations to ensure Teleport sustainably maintains its asset-light, low-cost structure operating model.
5. The proposal to dispose of its aviation business has received shareholders' approval at the Extraordinary General Meeting (EGM) in mid-October. The Group is now in its final stages where it needs to fulfil the conditions precedents set forth in the proposal, while waiting for approval from the high court. Simultaneously, it has released the requisite announcement for the PN17 regularisation plan and will soon submit the EGM circular to Bursa Malaysia. The group aims to complete the aviation business disposal by January 2025 and aim to exit the PN17 status by the first quarter of 2025, subject to the necessary waiver and approvals from Bursa Malaysia and other regulatory authorities.

Forecasts. We now forecast a profit of RM1,136m in FY24F compared to a loss of RM398m and raise FY25F by 73%.

Valuations. We incorporate ADE (MRO business) into our sum-of-parts. Consequently, our SoP-TP is raised from RM0.78 to RM1.06 (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. Looking farther into CY24, we project CAPITALA's system-wide revenue seat km (RPK) to grow 20% to an estimated 70b in CY24, after recovering by an estimated 24b to 58b in FY23 based on our forecasts. The group reiterated that the passenger throughput recovery is gaining traction. It is targeting to reactivate 187 aircrafts with 161 aircrafts available for operations, and its operating capacity to reach 74% of pre-Covid level, leveraging on the high travel season and the newly established visa-free travel between China and Malaysia starting 1 Dec 2023. 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 2024 as it adds new international lanes and delivery hubs. BigPay has also launched its digital lending platform to provide new loan products.

Investment case. 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. Reiterate MARKET PERFORM.

Risks to our recommendation include: (i) stronger recovery in air travel, (ii) lower jet fuel prices, (iii) sooner-than-expected uplift from the PN17 status, and (iv) monetisation of its digital assets.

Source: Kenanga Research - 29 Nov 2024