Review

• Stripping off a remeasurement gain of RM1.4bn and other exceptional items, Capital A’s 1H23 results returned to losses of RM82.8mn. However, we deem this as within expectations, considering the seasonal factor where earnings tend to peak in 4Q.

• Capital A achieved another good set of operating data with combined ASK (available seat kilometer) and RPK (revenue passenger kilometer) of all operating units (i.e.: MAA, TAA, IAA, PAA) growing 18% and 17% QoQ (131.9% and 145.6% YoY) respectively. However, this represented only circa 75% of 2Q19 performance, indicating the airlines have not fully recovered. Among all units, IAA (Indonesia AirAsia) outperformed its sister companies with a decent load factor of 84.2% in 2Q23. (see Figure 1 – 4)

• In terms of yield, however, the CASK (Cost/ASK) outgrew RASK (Revenue/ASK) in 2Q23 when the group added more capacity to the market. In specific, the CASK surged 12.9% QoQ to 22.2sen while the RASK declined by 5.2% to 18.7sen, leading to negative spread in 2Q23. The surge in CASK was mainly due to increase in operating costs such as staff cost, fuel and maintenance.

• The non-airline business segment reported higher revenue of RM579.1mn (118.5% YoY) and turnaround of EBITDA to RM60.9mn (vs RM40.4mn loss in 2Q22). The recovery was led by the aviation service segment (ADE) as the company has additional 7 hanger checks in 2Q23 (total 22 in 1H23) to cater for pent-up demand for MRO services. Besides, the cargo (Teleport) and SuperApp segments also delivered stronger earnings in 2Q23, thanks to robust e-commerce deliveries and increased demand for travel services (see Figure 5 & 6)

• All in, Capital A achieved its third-consecutive EBITDA positive quarter at RM437.6mn (adjusted for EI) in 2Q23. The operating cash flow inflow was stable at RM484.9mn, boosting the group’s total cash to RM735mn as at June- 23. However, the deficit in shareholders’ fund expanded to RM8.4bn after the group acquired the remaining stake in PAA.

Impact

• No change to our FY23-25 earnings projections.

Outlook

• The acquisition of minority stake in PAA has added RM2.4bn to its retained loss but the impact was mitigated by the RM1.4bn remeasurement gain from consolidating TAA operations. The increase in capital deficit would not derail its regularisation plan to uplift the company from PN17. In fact, the company has submitted the draft document for consultation to Bursa Malaysia and is confident to complete the regularisation plan by 4Q23 or 1Q24.

• The group is optimistic about 2H23 outlook with stronger fare and greater demand particularly from China and India. As such, management is confident of achieving the consensus forecast for FY23. For 2Q23, the group has reactivated 165 A320 and 1 A330 and hope to increase the operating fleet size to 200 by 4Q23.

• The launch of AirAsia Cambodia and commencement of business will be in Nov-23 and Capital A will have a controlling stake over the operations. The group would begin the operations with 2 aircraft. Overall, we are positive on this initiative to expand its network and believe it would further strengthen its market position in the Asean market.

Valuation

• We maintain Capital A’s target price at RM1.00/share based on unchanged 8x CY24 earnings. We downgrade the stock to Sell (from hold) as the recent price rally has partially reflected the promising earnings outlook and favourable outcome on its PN17 status. Perhaps, it is time to relook at the cost pressure amid earnings recovery.

Source: TA Research - 30 Aug 2023