AirAsia reported a 4QFY19 net loss of RM385m (4Q18: net loss of RM395m). Excluding one-off items (i.e. forex gain of RM174.6m, FV loss on derivatives of RM33.1m, deferred tax liability of RM139.6m, prior year share of losses from AirAsia India (AAI) of RM133.5, accounting policy realignment for associates of RM74m, consultant costs for sales and leaseback (SLB) transactions of RM12.9m, tax provisions of a subsidiary of RM49.3m, and discounting of a long term receivable of RM40m), AirAsia recorded a core net loss of RM76.6m. This brings its FY19 to a core net loss of RM59.1m, below our and consensus expectations of full year net profit of RM24.2m and RM93.8m respectively. The discrepancies were mainly due to higher-than-expected losses from Digital non-airline businesses (i.e. AirAsia.com, BigPay and RedBeat Ventures (RBV: exclude Teleport)). We maintain our forecast however, having already lowered our expectations recently. Since our downgrade on 3rd February, share price has fallen by about 23%. As such, we upgrade AirAsia to Neutral from Trading Sell, with an unchanged TP of RM1.21 pegged to 1x FY20F P/BV.

• Revenue for airline grew 18% YoY to RM3.2bn in 4Q19, mainly due to a 9% increase in passengers carried and seat capacity growth of 11% YoY. The Group’s capacity was attributed to 32% and 27% YoY growth in Indonesia (IAA) and Philippines (PAA) units respectively as they open and reopen new routes, while Malaysian (MAA) unit added 4% YoY capacity. Its Group’s unit passenger revenue also grew by 7% YoY to RM234, compared to RM219 in 4Q18. For full year FY19, revenue surged 15% YoY to RM12bn, with unit passenger revenue increased 2.3% YoY to RM224.

• Higher CASK ex-fuel after accounting for MFRS16 impact on SLB of aircrafts. Cost per ASK excluding fuel (CASK ex-fuel) in 4Q19 jumped 7% YoY at 11.28 sen, compared to 10.57 sen in 4Q18. This was following the increase in staff costs (+18%), user charges (+13%), and share of associates’ losses (+282%). Average fuel cost was lower by 10% YoY to USD83 per barrel in 4Q19 (vs 4Q18: USD92/bbl). This brings its aircraft fuel expenses lower by 1% YoY to RM1.09bn despite fuel consumption increasing by 6% YoY to 3.1m barrels in 4Q19. Overall, CASK declined 3% from 16.85 sen in 4Q18 to 16.37 sen in 4Q19. Full year FY19, CASK increased 7.5% YoY, from 14.71 sen to 15.81 sen.

• Outlook for 2019. Due to Covid-19, the Group is currently forecasting a YoY declined in ASK growth for MAA (-10%) and Thailand (TAA) units (-23%) respectively, with Group-wide load factor of 77% and 76% for 1Q20 and 2Q20 respectively. It currently replacing cancelled international flights with more domestic and intra-Asean flights to mitigate the downside impact. The Group will be focusing on cash conservation in FY20 by freezing the hiring for the airline business, not extending the expiring leased aircraft, negotiating for lower aircraft lease rates from the lessors, as well as lowering maintenance fees with their service providers. Meanwhile, incentives from the Government and industry players also expect to partly cushion the negative impact from the outbreak e.g. lower airport operation charges and lower excise duty on fuel to domestic Thailand.

• Fuel hedging status. To-date, the Group has hedged 70%-80% of Brent crude at an average of USD59.71/bbl for FY20. Meanwhile, it also hedged 18%-21% of crack for 1Q20 to 3Q20 at a range of USD8.42 to USD11.89.

Source: PublicInvest Research - 28 Feb 2020