Review

• Excluding exceptional items such as foreign exchange loss of RM170mn and other exceptional items, Capital A recorded its second quarterly loss in a row of RM100.5mn in 3Q23. Cumulatively, the 9M23 total core loss of RM169.7mn was a major disappointment if compared to our full-year forecast of RM399.6mn profit and consensus estimate of RM155.0mn. The variance was largely due to higher-than-expected operating costs, i.e. staff, fuel and maintenance costs.

• The recovery in operations softened with modest growth in combined ASK (available seat kilometre) and RPK (revenue passenger kilometre) of all operating units (i.e.: MAA, TAA, IAA, PAA), growing at 5.2% and 7.6% QoQ in 3Q23 (vs 18% and 17% QoQ growth in 2Q23) respectively. Typically, TAA recorded a weaker passenger growth (-1.9% QoQ) and moderation in PRK (+1.4% QoQ), which we attribute to the aftermath of Thai general election. Elsewhere, IAA (Indonesia AirAsia) continued outperforming its sister companies with a decent load factor of 88.6% in 3Q23. (see Figure 1 – 4)

• In terms of yield, the QoQ increase in RASK (Revenue/ASK) of 4.7% outpaced the QoQ growth in CASK (Cost/ASK) of 2.2% caused by higher staff cost, fuel and maintenance expenses. However, the group continued to register negative spread (i.e. 0.69sen/ASK in 3Q23), indicating the airlines still operate at sub-optimal levels. Note that the group only operated 156 aircraft in 3Q23 out of its total fleet size of 211.

• The non-aviation segment reported higher revenue of RM649.98mn (+12.2% QoQ, +114.5% YoY) and turnaround of EBITDA to RM74.4mn (vs RM7.7mn loss in 3Q22). The recovery was led by the aviation service segment (ADE), which registered record quarterly revenue and EBITDA of RM164.6mn (+19.3% QoQ, +106.7% YoY) and 42.8mn (+16.1% QoQ, +117.1% YoY) respectively, thanks to pent-up demand for MRO services. This more than offset QoQ declines in EBITDA contribution from cargo (Teleport) and SuperApp. (see Figure 5 & 6)

• All in, Capital A achieved its fourth consecutive quarter of positive EBITDA at RM447.6mn (adjusted for EI) in 3Q23. However, despite positive cash flow from operating activities (RM377.9mn) in 3Q23, the cash pile reduced by RM156.5mn or 21% QoQ due to repayments of bank borrowings and lease liabilities. As at Sep-23, Capital A’s deficit in shareholders’ funds surged to RM8.43bn from RM8.39bn in the preceding quarter.

Impact

• We now project a net loss of RM35.3mn for FY23 versus our previous forecast of RM399.6mn after revising fuel expense, staff and maintenance costs higher by 25%, 17.5% and 56.9% respectively. Also, we reduce our FY24-25 earnings projections by 31.6-63.9% to RM324.5mn and RM487.1mn.

Outlook

• Looking forward, management is optimistic about 2024 performance with greater earnings visibility, driven primarily by 1) increase in seat capacity to capitalise on visa-free travels in China, Thailand and Malaysia, 2) stable airfare with lesser competition, 3) robust growth in non-aviation segment especially ADE.

Valuation

• Given the change in earnings forecast, we reduce Capital A’s target price to RM0.85/share (from RM1.00/share previously) based on 10x CY24 earnings. Maintain Sell

Source: TA Research - 1 Dec 2023