INVESTMENT HIGHLIGHTS

• 1QFY19 ASK grew at +11.0%yoy partially driven by good mix of domestic and international routes.

• Load factor remained robust at 88.0% in 1QFY19 with strong passenger growth in the seasonally strong quarter

• TAA also stood resilient with a load factor of 90.0% in 1QFY19

• Earnings estimates adjusted downwards following a more conservative jet fuel price assumption

• Maintain BUY with a revised TP of RM3.11 per share

1QFY19 ASK grew at +11.0%yoy. In 1QFY19, the ASK of consolidated AOCs (Malaysia, Indonesia & Philippines) of AirAsia Group Berhad (AAGB) increased by +11%yoy to 17,788m. The improvement in ASK was partially attributable to the good mix of domestic and international routes for AAGB’s AOCs.

Net addition of aircrafts led to growth. Fleet size in 1QFY19 saw a net addition of 18 new aircrafts from 1QFY18 to 141 aircrafts. Looking forward, we expect ASK to remain resilient as AAGB undertakes delivery 24 new aircraft in FY19 while another 25 older aircrafts will be going through a sale and leaseback with Merah Aviation Holding Limited, an indirectly owned entity of Castlelake L.P.

AOC’s load factor remains strong at 88.0%. The expansion in RPK by +13.0%yoy in 1QFY19 outpaced the +11.0%yoy ASK expansion. As such, the load factor in 1QFY19 remained robust at 88.0%, the best in five quarters. We believe that this was contributed by the festive seasonality factor which boosted 1QFY19’s number of passengers by +18.0%yoy to a record of 12.5m.

Malaysia operations recorded the largest passenger increase in absolute terms. Amongst the three AOCs, Malaysia was the largest contributor of passengers carried in absolute terms, with an increase of 0.8m passengers. In percentage terms, Indonesia recorded the largest growth in passenger carried at +66.0%yoy. We opine the large increase was due to recent grounding of the Boeing 737 Max 8 by Indonesian carriers, prompting a shift to flights operated by AAGB.

TAA continues to exhibit strength, with a load factor of 90.0% in 1QFY19 as the ASK increased +10.0%yoy due added capacity for China and Indo-China routes. During the year, total passengers carried by TAA increased by +4.0%yoy to 5.9m passengers underpinned by the extension of the Visa on Arrival scheme for 20 countries.

Earnings estimates. Brent crude oil price has been hovering around USD70pb to USD74pb in the recent weeks. While recent crack spreads (difference of Brent crude oil price and Singapore jet kerosene spot price) have been below USD10pb, we believe that this may widen following the end of waivers for the purchase of Iranian oil for eight major buyers effective 2 May 2019. Therefore, we have imputed a more conservative jet fuel price assumption of USD90pb vs. USD85pb previously. Nonetheless, this will be partially mitigated by AAGB’s prudent hedging policy and possible increase in production by OPEC members to make up for the end of waivers. Taking all of these factors into consideration, our earnings forecast for FY19 and FY20 have been revised downwards to RM1.04b and RM1.08b respectively.

Maintain BUY. The group’s operational numbers in 1QFY19 remained robust with its healthy load factor supported by the continuous rise in RPK. Given these stable indicators, our positive outlook on the group stays intact on: 1) its more prudent hedging policy 2) stable operations with added capacity and 3) continuous improvement to derive higher values per km flown. It is notable that AAGB is trailing at a PER of 4.4x, while its Asian peers are approximately trading at a PER above 10x which we opine is unwarranted given the group’s position as the leading ASEAN low cost carrier. Based on our previous analysis for MAHB (BUY; TP:RM8.90) in our report dated 15 April 2019, we opine that the proposed international departure levy to not have much impact on the passenger growth. All things considered, we are maintaining our BUY recommendation with a revised TP of RM3.11 per share (previously RM3.40 per share) pegged to an unchanged 10x FY19 PER on its FY19 core EPS of 31.1 sen. Our revised TP is due to our earnings revision, as mentioned above.

Source: MIDF Research - 29 Apr 2019