INVESTMENT HIGHLIGHTS

• Results of FY18 below expectations

• Healthy growth seen in top-line amidst strong passenger growth.

• Ancillary income driven by dynamic pricing initiatives via digitalisation efforts

• Declared second interim dividend of 12sen per share

• Maintain BUY with adjusted target price of RM3.40 per share

Below expectations. The group recorded a cumulative FY18 normalised net profit of RM944.7m (-18.0%yoy). The results accounted for 86% and 71% of ours and consensus’ estimates respectively. The deviation was caused by the +38.5%yoy increase in fuel price expense to RM3.9b and higher operating lease expenses due to the completion of AAGB’s sale and leaseback transaction with BBAM.

Healthy growth seen on top-line. The group’s FY18 revenue was up by +9.2%yoy, to RM10.6b. The robust growth was due to higher passengers carried in 4QFY18, recorded at 12.1m which was the highest quarter in FY18 amidst seasonal factors. Total passengers carried in FY18 grew by +13.7% to 44.4m coming from an average load factor of 85% which we deem is reasonable as the group embarked on capacity expansion via increased frequencies and net addition of 18 aircraft.

Ancillary stood strong. The increase in passengers which contributed to higher FY18 ticket sales of +11.5% to RM7.7b, also resulted in ancillary income revenue to grow by +16.7%yoy to RM2.1b. Notably, baggage fees represented ~46.0% of ancillary revenue. The other driver for the strength in ancillary income was the dynamic pricing and ancillary personalisation which facilitated target marketing. For instance, the customisation of AAGB’s website and app to individual visitors has boosted conversion rates to reach above 5%.

Prudent hedging policies ahead. The group experienced a rise in opex particularly due to the increase in aircraft fuel expenses. Following the surge in average fuel price of +33%yoy to USD89/b coupled with capacity expansion of +18% in FY18, the share of fuel price out of total opex increased to 44.4%, from 42.2% a year ago. As such, the RASK-CASK spread turned negative at -0.1sen/km compared to 2.0sen/km a year ago. Looking ahead, AAGB has embarked on more conservative hedging policy; increasing its average hedge ratio to ~50% in FY19 compared to ~15% in FY18.

Source: MIDF Research - 28 Feb 2019