CAPITALA’s 1HFY24 results disappointed as the rebound in air travel fell short of expectations. We share in its optimism that the recovery in air travel will further accelerate moving into 2HCY24. It reported a core net loss of RM545m in 1HFY24 as higher costs negated a doubling of its top line. We now forecast a loss of RM398m (previously profit of RM229m) in FY24. We maintain our TP of RM0.78 but upgrade our call to MARKET PERFORM from UNDERPERFORM after the recent retracement in its share price.

It reported a 1HFY24 core net loss of RM545m, against our full-year net profit forecast of RM229m and the full-year consensus net profit estimate of RM502m. The variance against our forecast came largely from the rebound in air travel falling short of expectations.

YoY, its 1HFY24 revenue more than doubled on improved performance from both its airlines and digital segments. For the airlines segment, AirAsia Malaysia, Thailand, Indonesia, and Philippines delivered improved performance across key metrics, with a system-wide load factor of 90%, reflecting a 3ppts improvement. Passenger volume grew 67% to 32m (84% of Pre-COVID) boosted by higher ASK (+63%), outpacing capacity growth of 7% while capacity recovery achieved 81%. The growth was largely attributed to routes to China and India following visa-free travel implementation at the end of 2023 for China and India travellers. Additionally, both domestic and international segments are experiencing similar growth rates, indicating a holistic recovery across AirAsia's network. AirAsia Philippines and Thailand emerged as top performers, chalking the highest load factor of 93%. AirAsia Malaysia and Indonesia followed closely with an impressive load factor of 89% and 87%, respectively.

For the digital segment, Capital A Aviation services’ 1HFY24 revenue rose 30% of which 67% was contributed by ADE, followed by Santan (15%) and the balance by DARTS and Capital A Consultancy. Teleport’s revenue rose 35% driven by growth from existing and onboarding of new customers, re-activation of AirAsia fleet, and additional capacity from third party airlines allowing expansion into new lanes beyond AirAsia’s network.

However, it dipped into a core net loss of RM545m due to high depreciation, aircraft leasing charges and finance cost.

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

1. To capitalise on the robust demand, the group is currently prioritising the active expansion of its capacity and network to meet growing demand. It reiterated that the passenger throughput recovery is gaining traction. In 2HCY24, it anticipates to reactivate additional 15 planes out of the 22 non-active aircrafts and receive additional eight new aircrafts, which will allow investment in network growth across the region. With the returning capacity, the airline will be in a position to negotiate for better airport and tourism incentives, and target to launch 21 new routes in the next quarter. The immediate focus remains to optimise fares and yield while continuing to monitor the global fuel price given potential escalation of the Middle East conflict.
    
2. To recap, CAPITALA has recently announced disposal of its aviation group to AirAsia X in exchange of shares. The draft circular and notice of Extraordinary General Meeting, outlining the proposed disposal of its aviation business, was submitted to Bursa Malaysia in July for their review and clearance and now awaiting approval from Bursa Malaysia.
    
3. On the digital front, the construction of Asia Digital Engineering (ADE)’s new base maintenance facility in KLIA is on track with the first six new lines completed and the remaining eight lines on track for operation by the end of 2024. It is expanding, starting with the launch of its line maintenance services in Cambodia, the Philippines and Indonesia.
    
4. Teleport aim to deliver two million parcels per day by the end of 2025. It is aggressively expanding its capacity - not just through AirAsia belly space but also additional third party airline belly capacity via Air Partners, having onboarded major airlines namely Etihad Cargo, Turkish Cargo, and Pakistan International Airlines during 2QCY24. Teleport addressed reliability issues of its freighters in 2QCY24, and moving forward can expect improved performance in its freighter operations in the coming quarters. Optimising its mixed fleet operations of freighters and belly capacity, combined with continued growth via Air Partners as they provide Teleport complementary capacity, trade lanes and network reach, are critical to achieve Teleport’s ambitious goal of ten-fold parcel growth in the coming year.

Forecasts. We now forecast a loss of RM398m in FY24 compared to a profit but keep our FY25F forecast.

Valuations. We roll forward our valuation base from FY24F to FY25F. 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 operations, 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. We Upgrade it to MARKET PERFORM from UNDERPERFORM after the recent retracement in its share price.

Risks to our recommendation include: (i) stronger recovery in air travel, (ii) lower jet fuel prices, (iii) sooner-than-expected uplift from the PN17 status, and (iv) monetisation of its digital assets.

Source: Kenanga Research - 2 Sep 2024