Review

• Removing: 1) all exceptional items (RM180.9mn), 2) the deferred tax credit (RM141.3mn), 3) one-off capital injection to offset AirAsia India’s prior losses (RM147mn), which charged to income statement, and 4) adding back unrecognised losses from India operations (app. RM45.90mn), AirAsia Group’s (AirAsia) recorded 1H19 core losses of RM107.7mn. However, we deem the results as within our expectation (but below consensus estimates) as we expect a turnaround in 2H19 to be led by lower fuel costs along with the surge in air travelling especially in 4Q19.

• 1H19 adjusted core losses of RM107.7mn was mainly driven by: 1) the surge in fuel cost (+15.1%) as a result of higher fuel consumption and weakening of operating currencies against the dollar except Thai Baht and the Philippines Peso; 2) adoption of MFRS16 which caused depreciation and finance costs to increase by whooping 200.3% and 53.4% respectively; and 3) higher maintenance and overhaul cost (+84.6%) for increased leased aircraft. By sector performance, Philippines AirAsia (PAA) was the star performer with a net operating profit surging 253% due to strong demand for air travelling. Meanwhile, Thai AirAsia (TAA) was the worst performer with a loss after tax of THB879mn due to stiff competition.

• Malaysia AirAsia (MAA), Indonesia AirAsia (IAA) and Philippines AirAsia (PAA) (AAG) – IAA turnaround and PAA stayed profitable. Some weaknesses in load factor (84.6% in 2Q19 vs 85.3% 2Q18) contributed by Malaysian operations as the increase in capacity or ASK (+7.4% YoY) was not fully absorbed by demand or RPK growth (+6.0% YoY). Elsewhere, IAA has a stable load factor of 82.1% in 2Q19 while PAA enjoyed 1.3%-pts rise in load factor to 87.3% with 32.9% rise in RPK. In terms of yield, all units reported stronger yields, which more than offset the cost pressures, except MAA, which affected by irrational pricing in domestic space, causing the average fare down by 5%.

• Thai AirAsia (TAA) – Back to losses. The global trade tensions aggravated the seasonally slow quarter for the tourism sector in Thailand, resulting in a decline in load factor to 82% (vs 84 in 2Q18). According to Asia Aviation PCL, the international tourists to Thailand grew by a meagre 1% YoY, where Chinese tourists contracted the most at 8% in 2Q19. To lessen the impact of slow traffic and the rise in capacity (+12.3%), 2Q19 RASK was lowered by 5.4%, more than the decline in RASK (-1.3%), which resulted in negative spread. In local currency, TAA reported a loss before tax of THB879.1bn, or 55% higher than the losses of THB567.5bn in 2Q18. According to management, TAA is expected to be loss-making in 3Q19 but full-year should be profitable.

• India (AAI) – ready to fly international. Another strong load of 90.5% in 2Q19 supported by 31.7% rise in RPK, which outpaced the 29% rise in ASK. 2Q19 losses narrowed by 75.6% to INR151.1mn on the back of higher average fare (7.7%), passenger growth (25.1%), and decline in operating costs (lower fuel/ASK due to strong INR in 2Q19). AAI closed 2Q19 with a fleet size of 21, which means AAI can start its international operations this year after fulfilling the 5/20 requirements.
• Digital platform – gaining traction. The non-airline segments, which include Teleport, AirAsia.com, Big Pay and RedBeat venture, gained further traction with a combined revenue and EBITDA of RM118.75mn (394% YoY growth) and RM36.23mn (247% YoY growth). The contributing factors to this came from the increased belly space of combined aircraft as well as the surge in BigPay members to 700k. An interesting point to note is that BigPay’s revenue and LBITDA increased by approximately 4 folds YoY each in 2Q19, which we think is still far from achieving the critical mass. We believe these figures may grow exponentially when the group launches BigPay e-wallet in Singapore and Thailand soon.

Impact

• We make no change to our FY19-21 earnings projections. In our assumptions, we assume an average fuel price to be USD80/b for FY19, which is lower than USD85/b in 1H19. From 1 July 2019 to 28 August 2019, Singapore jet fuel swaps price has been trading at average 76.57/b.

Outlook

• Management expects all ASEAN operating affiliates to be profitable for 2019, targeting 3Q19 load factor to grow further for IAA (85% vs 82% in Q2), and PAA (88% vs 87% in Q2), and AAI (90% vs 91% in Q2) while MAA, TAA and IAA’s loads to remain stable at 85%, 82% and 90% respectively.

• Of the total 334 aircraft as at end 2Q19, 5 were owned by MAA and 21 by TAA and the rest were leased. Management indicates that it would sell all the owned-aircraft. The disposal proceeds to TAA will be channelled to AAGB via special dividend. For MAA, it would keep the proceeds.

• As far as hedging is concerned, the group has hedged 65% of fuel requirement at US$63.3b (Brent) for 2019, 73% at US$60.2/b for 2020 and 19% at US$59.5/b for 2021.

• For aircraft delivery, the group is expected to take possession of 20 aircraft this year, slightly higher than previous guidance of 18. AirAsia India is expected to receive higher allocation of 9, followed by IAA (4), PAA (3) and MAA (2). Both TAA and AirAsia Japan will receive one each.

Valuation

• Looking forward, the escalating US-China trade war and the devaluation of Yuan are likely to hurt any companies that are involved in tourism and hospitality industries. We do not think AAGB will be spared. However, taking a longer-term view where AAGB is gaining market share over its peers with its additional capacity would likely bode well for future profitability. As such, we reiterate our Buy recommendation with unchanged target price of RM2.60/share, based on 10x CY20 EPS. We are in AAGB for the long haul.

Source: TA Research - 29 Aug 2019