KEY INVESTMENT HIGHLIGHTS

• 3QFY19 ASK grew at +16.0%yoy partially driven by strategic addition of new routes

• Load factor remained robust at 84.0% in 3QFY19 with strong passenger growth driven by a series of long weekends in Malaysia

• TAA remained resilient with a load factor of 81.0% in 3QFY19

• Earnings estimates unchanged

• Maintain BUY with an unchanged TP of RM2.08 per share

3QFY19 ASK grew at +16.0%yoy. In 3QFY19, the ASK of consolidated AOCs (Malaysia+Indonesia+Philippines) of AirAsia Group Berhad (AAGB) increased by +16.0%yoy to 19,024m compared to the +10.0%yoy growth in 3QFY18. 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 20 new aircrafts from 3QFY18 to 147 aircrafts in 3QFY19. This enabled the AOCs to fly a higher number of stages while maintaining a reasonable average stage length of 1,224 km.

AOC’s load factor remained strong at 84.0%. The expansion in RPK by +18.0%yoy in 3QFY19 outpaced the +16.0%yoy ASK expansion. As such, the load factor in 3QFY19 remained robust at 84.0%, 2ppts higher than a year ago. We believe that this was underpinned by the series of long weekends in Malaysia particularly during September 2019 which boosted 3QFY19’s number of passengers by +20.0%yoy to another record high of 13.0m. Overall, the number of passengers carried in 9MFY19 grew by +18.7%yoy to 38.4m.

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 in 3QFY19, with an increase of 0.9m passengers. In percentage terms, Indonesia recorded the largest growth in passengers carried at +66.0%yoy.

TAA remains resilient despite the low peak season amidst the +19.0%yoy surge in Chinese tourists visiting Thailand in August. As such, load factor remained strong at 81.0% in 3QFY19 with both RPK and ASK increasing by almost the same rate. For 9MFY19, total passengers carried by TAA increased by +4.1%yoy to 16.7m. We expect growth in passengers to continue, supported by the extension of free visas on arrival for visitors from China and India beyond October 2019 to April 2020.

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

Target price. We maintain our target price at RM2.08 per share. Our target price is derived by pegging our FY20F EPS of 18.9sen to an unchanged target PER of 11x. The target PER is premised on AAGB’s regional peers which are trading at a 12-month trailing PER of 11x on average.

Maintain BUY. We continue to like AAGB as the company continues enhance its cost structure, along with its efforts of rationalising revenue and cost via digitalisation efforts. Our positive outlook on the AAGB also hinges on: 1) its more prudent hedging policy, 2) stable operations with added capacity, and 3) continuous improvement to derive higher values per km flown. Meanwhile, the adoption MFRS 16 will be a headwind in the next coming years as the majority of AAGB’s fleet are leased. Nonetheless, AAGB is expected to gain from lower amount of interest beyond the fifth year of the lease term. We opine that passenger growth in Malaysia to remain intact despite the departure levy which took effect in September 2019 as the levies gazetted are lower than regional peers such as Thailand and Hong Kong. As for low cost carriers such as AAGB, the percentage of departure levy from the total ticket price is still immaterial at around 1.6% on average for normal fares. All in, we maintain our BUY call with a target price of RM2.08 per share.

Source: MIDF Research - 23 Oct 2019