Review

• Stripping out: 1) all exceptional items (-RM331.4mn), which came mostly from RM214.5mn fair value loss on derivative, 2) deferred tax credit (RM433.6mn), 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 9M19 core losses of RM86.1mn, which trailed analysts’expectations. The variance was largely due to underestimation of fare pressure, especially in Malaysia, arising from intense price competition.

• 9M19 earnings slipped into losses of RM86.1mn due to an adoption of MFRS16, which caused depreciation and finance costs to increase substantially by 230.2% and 53.0% respectively, at a pace much faster than revenue growth of 12.4%. Maintenance and overhaul was another cost component, which surged by whooping 93.4% and contributed to losses.

• By sector performance, Philippines AirAsia (PAA), Indonesia AirAsia (IAA) and AirAsia India (AAI) were star performers for this quarter with higher load factor along with favourable RASK-CASK spread. Malaysia AirAsia (MAA) had its RASK declined by 4.6% while CASK increased by 12.2%. Although Thai AirAsia (TAA) managed to reduce CASK by 7.5% YoY for this quarter, its load factor had declined to 80.5% (vs 80.8% in 3Q18 & 81.7% in 2Q19).

• Malaysia AirAsia (MAA), Indonesia AirAsia (IAA) and Philippines AirAsia (PAA) (AAG) – Yield stress. For 9M19, AAG recorded higher load factor of 85.6% (+0.9%-pts YoY) mainly due to market share gain by IAA and PAA. MAA’s load factor was relatively stable at 85.4% (-0.2%-pts YoY) but this was at the expense of lower fare. The price competition started by Malaysia Airlines has hurt airlines’ profit and management believe the fare pressure to normalise in 4Q19.

• Thai AirAsia (TAA) – loss expanded in 3Q19. The global trade tensions and strong Thai baht were to blame for the decline in load factor to 83.9% (-1.2%-pts) for 9M19. Yield was also under pressure as the decline in RASK (-6.1%) was at a faster pace than CASK (-2.4%). In local currency, TAA reported a loss before tax of THB716.7mn for 9M19 compared to a profit of THB539.4mn a year ago.
   
• India (AAI) – Load >90%. AAI was the only affiliate recorded >90% load factor for 9M19, fuelled by demand growth of 39.6% and capacity growth of 28.2%. However, 9M19 loss before tax were little changed at INR4.7tn owing to substantial rise in staff cost, maintenance and overhaul costs and finance expenses.
   
• Digital platform – EBITDA positive by 3Q20. Teleport reported higher revenue (48.4%) and EBITDA (14.9%) of 121.1mn and 62.1mn respectively for 3Q19. Meanwhile, AirAsia.com and BigPay suffered greater LBITDA of RM31.7mn (317%) for this quarter while building the economies of scale. According to management, these units are expected to be EBITDA-positive by 3Q20. Note that BigPay has obtained a licence in Singapore and would roll out its services soon.

Impact

• We now assume MAA’s RASK to decline by 14.4% YoY (from decline of 9.2% previously) for 2019 to factor in the greater-than-expected fare pressure in 3Q19. However, we revise the growth in MAA’s RASK to 7% (from 4% previous) for fare normalisation in FY20. No change to our RASK growth assumption of less than 1% for FY21. All in, we cut our FY19/20/21 earnings projections by 77.4/22.8/38.2%.

Outlook

• Management is positive on 2020 outlook as they look forward to fare normalisation in 4Q19. Meanwhile, the yield is expected to rise with the use of A321neo aircraft, which come with 236 seats or 50 seats more than A320neo.

• The group has received its first A321neo recently and will take delivery of 3 more for 2019. For 2020, 6 out of total 12 aircraft to be delivered to AirAsia would be A321neo. AirAsia will deploy the aircraft to service destinations with limited slots.

• Currently, AAGB has 5 aircraft which will be disposed to BBAM group pursuant to an earlier agreement signed by both parties. TAA would also dispose all 21 units of its owned-aircraft next month to unlock asset value.

• No major changes in fuel hedging as the group has maintained its position in hedging 65% of fuel requirement at US$62.77b (Brent) for 2019, 73% at US$60.22/b for 2020 and 19% at US$59.45/b for 2021.

Valuation

• Looking beyond price competition, which is unsustainable in the long run, we advocate investors to Buy into AirAsia for its market share gain as well as its established networks, which are crucial for future profitability. Target price is reduced to RM2.01/share based on 10x CY20 EPS. Maintain Buy.

Source: TA Research - 28 Nov 2019