INVESTMENT HIGHLIGHTS

• 2QFY19 ASK grew at +17.0%yoy partially driven by strategic addition of new routes

• Load factor remained robust at 85.0% in 2QFY19 with strong passenger growth driven by seasonality factors in ASEAN

• TAA continued to be resilient with a load factor of 83.0% in 2QFY19

• Maintain BUY with an unchanged TP of RM3.29 per share

2QFY19 ASK grew at +17.0%yoy. In 2QFY19, the ASK of consolidated AOCs (Malaysia+Indonesia+Philippines) of AirAsia Group Berhad (AAGB) increased by +17%yoy to 18,645m compared to the +12%yoy growth in 2QFY18. The improvement in ASK was partially attributable to the network expansion via strategic addition of new routes and increased frequencies for both domestic and international routes for AAGB’s AOCs.

Net addition of aircrafts led to growth. Fleet size saw a net addition of 22 new aircrafts from 2QFY18 to 146 aircrafts in 2QFY19. This enabled the AOCs to fly a higher number of stages while maintaining a reasonable average stage length of 1,233 km.

AOC’s load factor remains strong at 85.0%. The expansion in RPK by +16.0%yoy in 2QFY19 almost matched the +17.0%yoy ASK expansion. As such, the load factor in 2QFY19 remained robust at 85.0%. We believe that this was supported by the festive seasonality factor around ASEAN which boosted 2QFY19’s number of passengers by +18.0%yoy to another record high of 12.8m. Overall, the number of passengers carried in 1HFY19 grew by +17.9%yoy to 25.4m.

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 passengers carried at +58.0%yoy.

TAA remains resilient despite off-peak tourism season combined with the 3.7% appreciation in the Baht against the U.S dollar in 2QFY19 and weaker-than-expected arrivals especially from China. As such, load factor stood at 83.0% in 2QFY19 as the ASK increased by +12.0%yoy. For 1HFY19, total passengers carried by TAA increased by +4.5%yoy to 11.4m. We expect growth in passengers to continue, supported by the visa-on-arrival scheme for 39 countries effective 1 August 2019.

Earnings estimates. We make no changes to our earnings estimates.

Maintain BUY. The group’s operational numbers in 2QFY19 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. Based on our previous analysis for MAHB (BUY; TP:RM9.43) 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 an unchanged TP of RM3.29 per share pegged to an unchanged target 11.0x PER on its FY20F core EPS of 29.9 sen.

Source: MIDF Research - 24 Jul 2019