Capital a - Still in Red Despite Air Travel Rebound

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CAPITALA’s FY23 results disappointed as it was unable to push yields higher. Its positive EBITDA was completely erased by depreciation, aircraft leasing charges and finance cost. There is an urgent need for it to firm up on its PN17 regularisation plan. We maintain our FY24F forecasts, TP of RM0.78 and MARKET PERFORM call.

It reported a core net loss of RM450m in FY23, against our full-year net loss forecast of RM33m and the full-year consensus net loss estimate of RM352m. We believe the variance against our forecast came largely from its inability to push yields higher without eroding demand.

Its FY23 revenue more than doubled underpinned by an 88% load factor with passengers doubling to 49m (about 85% of pre-COVID) boosted by higher ASK (+>100%) and RPK (>100%). In FY23, the group activated 185 aircrafts as robust travel demand resulted in strong passenger throughput. AirAsia Malaysia achieved a load factor of 88% (about 80% of pre-pandemic level). AirAsia Indonesia achieved a healthy load factor of 85% (+6ppts YoY) due to pent-up travel demand between Singapore and Denpasar, and Jakarta and Singapore. Similarly, AirAsia Philippines’s seat capacity and passengers carried recovered to between 85% and 89% of pre-pandemic levels leading to load factor of 91%, which together with AirAsia Thailand recorded the highest load factor of 90% (+6ppts YoY). Notably, China’s routes achieved an astounding load factor of 90%.

In the digital segment, Airasia Super app revenue rose 80% driven by the strong revival of domestic and international travel demand in most regions. Bigpay’s revenue jumped 42%, led by continued growth in both payments and remittances. Teleport’s revenue rose 50% driven by growth from existing and onboarding of new customers, reactivation of AirAsia fleet, and additional capacity from third party airlines allowing expansion into new lanes beyond AirAsia’s network. All in, EBITDA came in at RM2b compared to RM49m in FY22 due to better performance from airlines. Fuel charges partly mitigated the high fuel costs and supported the improvement in EBITDA in FY23.

However, it dipped into a core net loss of RM450m after accounting for depreciation, aircraft leasing charges and finance cost. Still, this represents an improvement vs. a core net loss of RM3.2b in FY22.

QoQ, its 4QFY23 revenue rose 15% underpinned by by an 88% load factor. Its EBITDA rose 33% due to better performance from airlines as RASK (+16%) more than offset higher CASK (+4%). Similarly, it dipped into a core net loss of RM159m after accounting for depreciation, aircraft leasing charges and finance cost. However, this shows an improvement over a net loss of RM179m three month ago.

The key takeaways from the analysts briefing yesterday are as follows:

1. The group is in the final stages and on track to complete the regularisation plan by 4QCY24. It is on track to sign the sale and purchase agreement with AirAsia X by end 1QCY24. To recap, part of its regularisation plan to lift it out of the PN17 status involves two major corporate exercise namely: (i) to divest its aviation group to AirAsia X in exchange of shares and (ii) proposed listing of a unit, which is the licensee of the AirAsia brand on NASDAQ via entered into a letter of intent with Atherium Acquisition Corp (GMFI), a special purpose acquisition company.

2. The group reiterated that the passenger throughput recovery is gaining traction. It is targeting to re-activate 202 aircraft by end CY2024 (presently 187 aircraft) available for operation and capacity to reach 83% of pre-COVID level. In addition to fleet re-activation, it expects further upside from the current high yield environment underpinned by the robust demand with forward bookings in February and March standing at 91% and 49%, respectively. It plans to launch more than 60 new routes across the group, expanding in China and India and start AirAsia Cambodia operations by the mid 2024.

3. On the digital front, the construction of Asia Digital Engineering (ADE)’s new base maintenance facility in KLIA is on track with six new lines to begin operations from 3QCY24 and another eight new lines operational by end-2024. Teleport will focus its efforts on growing its core network beyond AirAsia via collaboration with more strategic partner airlines. It is looking to strengthen and extend our end-to-end operational capabilities with multi-modal, first-to-last mile capabilities in key markets, delivering reliable, affordable, next-day cross border logistics solutions in Southeast Asia.

4. AirAsia MOVE will concentrate on refining its inventory and pricing strategies, with the aim of boosting margins and increasing spending to grow its monthly active and transacting users. Similarly, airasia Ride is expanding across key airports in Malaysia, Bangkok, and Bali, with the objective of bolstering driver productivity and expanding market outreach. In the meantime, BigPay has been proactively streamlining its operational expenses and enhancing performance and is targeting to achieve its first EBITDA-positive month by end-2024

Forecasts. We maintain our FY24F forecast and introduce our FY25F numbers.

Valuations. We also keep our SoP-TP of RM0.78 (see below). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

Outlook. Looking farther into CY24, we project CAPITALA’s system-wide revenue seat km (RPK) to grow 20% to an estimated 70b in CY24, after recovering by an estimated 24b to 58b in FY23 based on our forecasts. The group reiterated that the passenger throughput recovery is gaining traction. It is targeting to reactivate 187 aircrafts with 161 aircrafts available for operation, and its operating capacity to reach 74% of pre-COVID level, leveraging on the high travel season and the newly established visa-free travel between China and Malaysia starting 1 Dec 2023. Its digital segment is expected to remain loss-making. airasia Super App is expected to grow, underpinned by the continued resurgence of travel demand from borders reopening and tactical campaigns, alongside expected growth from airasia Food, Ride and Xpress. Additionally, Teleport is expected to continue expanding throughout 2024 as it adds new international lanes and delivery hubs. BigPay has also launched its digital lending platform to provide new loan products.

Investment case. We continue to like CAPITALA for: (i) it being a beneficiary to the recovery in air travel post pandemic, (ii) its growing digital business, leveraging on its strong AirAsia brand and AirAsia’s existing client base, and (iii) its dynamic and visionary leadership that should help steer it out of the current financial difficulty. However, we are mindful of it still being under the PN17 status. Reiterate MARKET PERFORM.

Risks to our recommendation include: (i) the recovery in air travel stalls amidst a global recession, (ii) sustained high jet fuel prices, rendering air travel, especially low-cost air travel unaffordable, (iii) CAPITALA’s inability to lift itself out of the PN17 status, and (iv) persistent cash burn at its digital assets. a

Source: Kenanga Research - 1 Mar 2024

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