KEY INVESTMENT HIGHLIGHTS

• 9MFY19 earnings were below expectations

• Healthy load factors did not come at the expense of average fares

• Teleport on target to meet RM400m annual revenue target

• Expansion cards of other non-airline ancillary business; i.e. BigPay’s e-money license in Singapore

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

• Earnings estimates adjusted downwards

• Maintain BUY with revised TP of RM2.04 per share

Below expectations. The group recorded a 3QFY19 normalised net profit of RM6.0m (-96.3%yoy). This brings the cumulative 9MFY19 normalised net profit to RM27.3m (-96.7%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-lease liabilities and depreciation of right of use of asset following the MFRS16 adoption which is more than what we had expected. In addition, higher maintenance expense following higher provision for engine overall with higher number of leased aircraft. We expect the effect to be felt until end of FY19 when a new base is established.

RPK growth outgrew expansion in ASK…. The group’s 9MFY19 revenue was up by +14.0%yoy to RM8.8b. The robust growth was due to another record breaking number of passengers carried in 3QFY19 of 13.0m which was supported by the festive seasonality factor around ASEAN. As a result, the number of passengers carried in 9MFY19 grew by 18.8%yoy to 38.4m. With strong growth in passengers carried, the 15.8%yoy growth in RPK to 47,465m outpaced the ASK growth rate of 14.6%yoy in 9MFY19.

….which helped maintained a healthy load factor. As such, the load factor in 9MFY19 remained robust at 85.7%. This was despite the 17.6%yoy increase of international routes for its AOCs (Indonesia and the Philippines) and net addition of 23 aircraft. More importantly the strong load factor did not come at a cost at a lower average fares. In fact, there was a +0.2%yoy increase in average fares for 9MFY19 while Malaysia’s market share rose +3ppts to 60.0%.

Beefing up its non-airline businesses. The increase in passengers which contributed to higher 9MFY19 ticket sales of +18.9% to RM6.6b, also resulted in airline related ancillary income revenue to grow by +15.3%yoy. As for non-airline ancillary segments, total revenue more than quadrupled to RM475.2m. Most of the contribution for non-airline ancillary revenue came from Teleport at 70.2% and we expect it will reach its target of RM400m given the revenue recorded of RM333.5m in 1HFY19. Performance of Teleport in 2HFY19 will be enhanced by: (i) the launch of ‘teleport.social’, a platform enabling sellers on social media to integrate with Teleport’s logistics infrastructure; (ii) joint investment with Gobi Partners in EasyParcel; and (iii) direct interline agreement with Lufthansa Cargo.

Source: MIDF Research - 28 Nov 2019