INVESTMENT HIGHLIGHTS

• Fairly successful operation in 1HFY18

• Hike in fuel price, a dampener to earnings

• Earnings forecasts revised lower

• Maintain BUY with adjusted TP of RM3.62

Earnings were resilient in 1HFY18. Whilst net profit came in lower by -10.5%yoy in 1HFY18 due to impact of fuel price increase, we believe that the group’s earnings were resilient as it remained profitable. In addition, operating margin was double-digit, with significant +10.3%yoy increase in revenue. The growth was encouraging due to the continuous expansion in capacity. However, we to recognize the potential earnings slowdown due to the hike in fuel price.

Hike in fuel price, a dampener to earnings. Fuel price on average came in +33.7%yoy higher from USD54.6/b since December 2017. Largely, this was attributable to the anticipated US sanctions on Iranian oil exports, shale bottlenecks and Venezuelan turmoil. Given the disruptions, we are expecting fuel price to remain volatile. Accordingly, downside risk of fuel is more visible to airlines, as it continues to account a large percentage of opex.

Fuel represented the bulk of opex. Note that the group’s fuel consumption accounted 42.0-45.0% of total opex. Based on our sensitivity analysis, every +1.0% rise in fuel price, will impact the net operating profit and net core profit by -1.7% and -3.5% respectively. The YTD fuel price is well above our earlier forecast of USD79.3/b. At this juncture, we are revising up our assumption on jet fuel price to USD85.0/b.

Impact to earnings. Subsequent to our revision, core net profit forecasts for FY18 and FY19 are revised by -18.9% and -19.4% respectively.

Maintain BUY with adjusted TP of RM3.62. We adjust our TP lower to RM3.62 (from RM4.47) pegging its FY19 EPS to PER of 10x. Despite the impact from the fuel price increase, we are maintaining our BUY call due to the group’s 1) compelling growth story, 2) stable operations with added capacity and 3) continuous improvement to derive higher values per km flown. In addition, we believe its integrated efforts to monetize its assets, via digitalization is strategic, as it takes advantage of its passengers’ database to enhance customer experience and improve ancillary incomes. Notably, the group’s recent announcement on collaboration with Google Cloud is planned to bring the group closer to forming a travel technology company.

Source: MIDF Research - 11 Oct 2018