INVESTMENT HIGHLIGHTS

• Results of 1HFY18 was below expectations

• Healthy growth seen in top-line

• RASK-CASK spread remained resilient

• Maintain BUY with adjusted target price of RM4.47

Below expectations. The group recorded cumulative 1HFY18 core net profit of RM612.1m, which came in below ours and consensus expectations. The earnings accounted for 38.2 % and 44.2% of full year estimates respectively. For 2QFY12, the net profit came in lower by - 30.6%yoy to RM272.1m. The decline was a result of an increase in operating expenses by +23.0%yoy, due to higher average fuel price at USD86.0/b.

Healthy growth seen on top-line. The group’s 1HFY18 revenue was up by +12.5%yoy, to RM5.2b. The robust growth was due to higher passengers carried in 2QFY18, recorded at 10.9m with growth of +13.2%yoy. For 1HFY18 the total passengers carried grew by +14.8% to 21.5m. While we noted that the increase in passengers has contributed to higher 1HFY18 ticket sales of +13.1% to RM3.7b, ancillary income revenue also grew by +10.0% to RM977.6m.

Breaking down the increase in opex. The group experienced a rise in opex particularly due to the increase in aircraft fuel expenses. Following the surge in average fuel price of +29.0% to USD89/b coupled with capacity expansion of +14.9% in 2QFY18, the group’s 1HFY18 fuel expenses were up by +26.9% to RM1.8b. While we note that fuel costs factor could become a concern, we are on the view that risk will be minimized via the group’s fuel hedging policy and gradual adjustments in airfare.

RASK-CASK spread remains resilient. In 1HFY18, despite the rise in opex, RASK-CASK spread remained resilient at 1.1sen/km, supported by higher cumulative revenue of ticket sales and ancillary. At this juncture, we believe the spread were still at an acceptable level considering the unfavourable fuel price. Moving forward, we opine yield could see further improvement driven by the group’s digitalization strategy coupled with capacity expansion that utilizes fuel-saving aircrafts.

Impact to earnings. We are revising our earnings forecast for FY18 and FY19 downwards by -8.1% and -9.0% respectively to take into account the higher operating expenses in the immediate term.

Maintain BUY with adjusted TP of RM4.47. Following our earnings adjustments for FY19, we adjust our TP lower to RM4.47 (from RM4.80) pegging its FY19 EPS to PER of 10x. We continue to like Air Asia as the company continues enhance its cost structure, along with its efforts to derive higher revenue from its existing and new routes. Overall, we believe the prospect of AirAsia remains sanguine predicated on: 1) stable demand growth with conservative ASK expansion of +10.0%; 2) new areas of growth in India and Japan.

Source: MIDF Research - 3 Sept 2018