INVESTMENT HIGHLIGHTS

• Results of 1QFY19 below expectations

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

• Ancillary income to be driven by its logistics arm, Teleport

• Prudent fuel hedging policy helped to contain the rise in fuel expense

• Declared special dividend of 90sen per share

• Maintain BUY with revised target price of RM2.92 per share

Below expectations. The group recorded a 1QFY19 normalised net profit of RM104.6m (-72.9%yoy), missing ours and consensus’ expectations by a variance of more than 10%. The negative variance was due to the substantial increase in finance costs following the MFRS16 adoption coupled with higher maintenance expense following higher provision for engine overall with higher number of leased aircraft.

RPK growth outpaced expansion in ASK…. The group’s FY18 revenue was up by +8.8%yoy, to RM2.8b. The robust growth was due to higher passengers carried in 1QFY18, growing by +17.8%yoy to hit a record of 12.5m amidst the festive season in February. As such, the ASK for 1QFY19 rose by +11.3%yoy to 17,788m, partially attributable to the good mix of domestic and international routes for AAGB’s AOCs. The expansion in ASK during the quarter was outpaced by the 13.5%yoy RPK expansion to 15,678m.

….which helped maintained a healthy load factor. As such, the load factor in 1QFY19 remained robust at 88.0%, the best in five quarters. This was despite the 17.0%yoy increase in capacity via increased frequencies and net addition of 18 aircraft. However, it is important to note that the strong load factor came at a lower average fares which declined -2.3%yoy.

‘Teleporting’ to better growth in freight services. The increase in passengers which contributed to higher 1QFY19 ticket sales of +14.9% to RM2.1b, also resulted in ancillary income revenue to grow by more than +20%yoy, maintaining a solid 23% contribution to revenue. Of the total ancillary revenue, RM143.6m or 27.6%, comprised of non-airline segments namely; Teleport, AirAsia.com and Redbeat Ventures. Teleport, AAGB’s logistics arm recorded a revenue of RM101m for the quarter (excluding belly space consolidation for Thailand AOC which will commence in 2QFY19), staying on track to meet its annual revenue target of RM400m. We opine that this would be achievable due to the arrangement with Oman Air to provide customers with access to Oman Air’s network covering Africa, the U.K. and Europe.

Source: MIDF Research - 30 May 2019