A Little Tense in 4Q18 Results SELL. Last Traded: RM3.09

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1 C O M P A N Y U P D A T E Tuesday, January 9, 19 FBMKLCI: 1, Sector: Transportation THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* AirAsia Group Berhad TP: RM3. (+3.7) A Little Tense in 4Q18 Results Last Traded: RM3.09 SELL Tan Kam Meng, CFA Tel: kmtan@ta.com.my Result Preview AirAsia Group (AirAsia) released selected operational data for 4Q18 yesterday before the release of 4Q18 results performance next month. However, we believe 4Q18 results will hinge much on the price movement of jet fuel than the operational data like load factors and so on. Also, forex movement is pivotal to 4Q18 results as fuel and operating lease expenses are paid in dollar. Jet fuel remained high in 4Q18. Figure 1 below suggests that 4Q18 core profit would be lower than 4Q17 s RM511.9, owing to higher jet fuel price. According to Singapore jet fuel swaps price, the average jet fuel price for 4Q18 surged 15.6 YoY to US$84.1/b. Comparing with quarterly profit of RM113. in 3Q18, 4Q18 would likely be stronger on the back of 5. decline in jet fuel and also the peak season for travelling. Figure 1 4Q18 results likely weaker YoY due to surge in jet fuel price US$/b 1 0 US$7.7 US$84.1 Feb16 May16 Sep16 Dec16 Mar17 May17 Jun17 Aug17 Nov17 Feb18 Jun18 Sep18 Dec18 Source: Bloomberg & TA Research Share Information Bloomberg Code AAGB MK Stock Code 5099 Listing Main Market Share Cap () Market Cap (RM) wk Hi/Lo (RM) 4.15/ mth Avg Daily Vol ('000 shrs) Estimated Free Float () 6. Beta 1.3 Major Shareholders () Tune Live Sdn Bhd 16.7 Tune Air Sdn Bhd 15.5 EPF 5.6 Forecast Revision FY18 FY19 Forecast Revision () Net profit (RMm) Consensus 1, TA's / Consensus () Previous Rating Buy (Downgraded) Financial Indicators FY18 FY19 Net debt/equity (x) Net cash Net cash CFPS (sen) P/CFPS (x) ROE () ROA () NTA/Share (RM).0. Price/ NTA (x) Share Performance () Price Change AIRASIA FBM KLCI 1 mth mth mth 1.7 (4.) 1 mth (15.5) (9.4) (1Mth) Share Price relative to the FBMKLCI USD gained strength against IDR, PHP and INR. In terms of currency movements, US dollar was relatively stable YoY against Ringgit and Thai Baht at USDMYR4.17 (+0.8) and USDTHB3.8 (0.35) respectively in 4Q18 (Figure & 3). However, it gained further strength YoY against Indonesian Rupiah (+9.3), Philippine Peso (4.6) and Indian Rupee (11.3), exerting more earnings pressure on Indonesia AirAsia (IAA), Philippines AirAsia (PAA) and AirAsia India (AAI), which are still stuck with losses in 3Q18 (Figure 4 to 6). Source: Bloomberg Page 1 of 7

2 Figure : Stable MYR in 4Q18 vs. 4Q17 Figure 3: Little changed in THB in 4Q18 vs. 4Q Figure 4: IDR depreciated 9.3 YoY in 4Q18, exerting pressure on 4Q18 earnings Figure 5: PHP depreciated 4.6 YoY in 4Q18, which would likely drag group s performance Figure 6: INR depreciated 11.3 YoY in 4Q18. AAI is expected to stuck with losses for 4 th straight quarters Mar16 May16 Sep16 Nov16 Mar17 May17 Sep17 Nov17 Mar18 May18 Sep18 Nov18 Source: Bloomberg & TA Research Page of 7

3 Capacity and Load Factor 19 new aircraft. AirAsia Group and companies took possession of 19 new aircraft in 18. Of these, 11 new aircraft were deployed for MAA operations. Meanwhile, to enlarge its market share in Thailand, India and the Philippines, TAA took delivery of 6 aircraft and both PAA and IAA received 5 additional aircraft in aircraft (old) were transferred to IAA from AirAsia Indonesia X, resulting in surge in IAA s total fleet size and capacity. Figure 7 MAA, TAA, PAA and AAI took additional aircraft to gain/defend market share MAA TAA IAA PAA AAI AAJ Unallocated Q16 Q16 3Q16 4Q16 1Q17 Q17 3Q17 4Q17 1Q18 Q18 3Q18 4Q18 The new aircraft has enhanced MAA s total capacity (available seat kilometre or ASK) by 9 YoY. It also lifted TAA, PAA and AAI s ASK higher by 8, 3 and 48 YoY, respectively for FY18. The increase in capacity appeared to be well absorbed by the resurgence in demand (Revenue passenger kilometre or RPK) as demonstrated by the relatively high load factor of more than (Figure 9 to 1). Indonesia AirAsia also chalked up a decent load factor of 81 (vs 4Q17 of 77) (Figure 13) despite the disastrous earthquake in Bali and Lombok and also the deadly crash of Lion Air Flight 610 in 4Q18, which will usually dampen travel sentiment. Although MAA, TAA, PAA and IAA recorded surge in demand, we would not jump to conclusions before the release of full data next month. We opine that the rise in demand could come at the expense of narrowing spread between revenue/ask (RASK) and cost/ask (CASK). In other words, margins are expected to fall as the rise in airfare is insufficient to cushion the increase in costs. To recap, AirAsia Group s 3Q18 spread narrowed to 0.4sen/ASK (Figure 8) from.0sen/ask in 3Q17 (vs 1.1sen/ASK in Q18) due to increase in jet fuel price. Page 3 of 7

4 Figure 8 AA Group (MAA, IAA and PAA) recorded narrowing spread between RASK and CASK in 3Q18 sen Spread/ASK Revenue/ASK Cost/ASK Figure 9: MAA Extra capacity in 4Q18 was well absorbed by resurgent in demand Figure 10: TAA Load factor was strong at above in 4Q ,000 7,000 6,000 5, ,000 3,000,000 1, Figure 11: PAA Tremendous increase in RPK which supported by rise in capacity Figure 1: AAI Higher capacity to cater for rising demand in 4Q ,000,500, ,500 1, Page 4 of 7

5 Figure 13: IAA Strong load in 4Q18 despite earthquake and plane crash in 4Q A Little Tense in 4Q18 Results Due to the surge in average jet fuel price and strengthening of US dollar against Indonesian Rupiah, Philippine Peso and Indian Rupee, we see tremendous cost pressure in 4Q18 results. As such, we maintain our FY18 earnings projections, which implies a steep 57.1 YoY decline in 4Q18 core profit to RM19.6. Having said that, the poor YoY results showing may not garner much market attention. We believe the market would be keener to know whether there will be a second special dividend in 4Q18 results. Note that AirAsia possessed cash and aircraft purchase deposit of total RM4.6bn as at 30 September 18. The total net cash stood at RM1.bn, netted out RM3. borrowings as at 3Q18. In 4Q18, the group transferred another 6 aircraft and 14 spare engines and received sales proceeds of USD in October 18. It had also paid the special dividend of sen/share (app. RM1.3bn) in Dec18. Stronger Oil Price and Weaker Ringgit in 19 We maintain our FY19 earnings projections of RM905.9 and RM1,074.1 respectively, premised on assumptions that: 1) the average FY19 jet fuel price to increase to US$85/b; and ) slight weakening of ringgit to average USDMYR4.15 in 19 and. Dividend wise, we expect AirAsia to declare 8sen dividend in 4Q18, on top of 5sen/share dividend which the company declared and paid in FY18. Valuation & recommendation Rolling forward the valuation base year to CY, we raise AirAsia s target price to RM3. (from RM.71 previously) based on unchanged PE multiple of 10x. We downgrade AirAsia to Sell (from Buy) as higher jet fuel price and weaker ringgit would likely crimp CY19 earnings. Also, Figure 14 depicts the negative comovement between AirAsia s stock price and ringgit performance and this reinforce our sell conviction as we are foresee ringgit to weaken in 19. Page 5 of 7

6 Figure 14 Negative comovement between AirAsia s stock price and ringgit USDMYR AAGB R = /1/17 1//17 1/3/17 1/4/17 1/5/17 1/6/17 1/7/17 1/8/17 1/9/17 1/10/17 1/11/17 1/1/17 1/1/18 1//18 1/3/18 1/4/18 1/5/18 1/6/18 1/7/18 1/8/18 1/9/18 1/10/18 1/11/18 1/1/18 1/1/19 Page 6 of 7

7 Profit and Loss (RM') Balance sheet (RM') YE Dec F 19F F YE Dec F 19F F Revenue PPE Associates EBITDA,8.1 3,6.9,9.8 1, ,635.5 JV Depr & Amor (710.8) (864.0) (834.5) (315.3) (90.7) Derivatives EBIT,033.4,54.6 1,347. 1,08.8 1,1. Others Net finance cost (487.7) (5.1) (357.5) (15.1) (30.9) LT Assets JV & associate (56.0) EI (90.9) , Trade receivables PBT 1,704.7,087.8, ,130.6 Cash Adj PBT*,198. 1, ,136.6 Others Tax (86.1) (516.4) (9.3) (9.) (.6) ST Assets Net profit 1,61.7 1,68.8, ,068.1 Adj net profit* Total Assets EPS (sen) DPS (sen) Trade payables Sales in advance Cash Flow (RM') Borrowings YE Dec F 19F F Others PBT ST Liabilities Non cash item Chg in workin cap. (.1) (17.6) LT Borrowings Tax (18.0) (5.7) (9.3) (9.) (.6) Others Others (175.0) (0.0) (0.0) (0.0) LT Liabilities CFO Share Cap Capex (116.5) (1976.7) (.0) (.0) (.0) Reserves Others Shareholder's Funds CFI (575.8) (1778.) 878. (.0) (.0) MI (5.) (1338.0) (1353.5) (1346.5) (1306.7) Liabilities + Equities Net Borrowing 83. (500.0) (6488.1) (.0) (99.0) Dividend Paid (111.3) (396.5) (676.0) (1.4) (1.5) Ratio Others (3154.6) (1.3) YE Dec F 19F F CFF (433.7) (1016.7) (9164.1) (501.4) (500.5) EPS Growth () 1.4 (7.7) (50.4) (4.) 18.5 PER (x) Key Assumptions (R F 19F F Div Yield () ASK MAA () Net cash/(debt) (RMm) (8837.6) (746.4) RPK MAA () Net gearing (x) Net cash Net cash Net cash ASK TAA () ROE () RPK TAA () ROA () RPK IAA () NTA (RM) RPK IAA () P/NTA (x) Jet fuel (USD/b) EV/EBITDA (x) Stock Recommendation Guideline BUY : Total return within the next 1 months exceeds required rate of return by 5point. HOLD : Total return within the next 1 months exceeds required rate of return by between 05point. SELL : Total return is lower than the required rate of return. Not Rated: The company is not under coverage. The report is for information only. Total Return is defined as expected share price appreciation plus gross dividend over the next 1 months. Gross dividend is excluded from total return if dividend discount model valuation is used to avoid double counting. Required Rate of Return of 7 is defined as the yield for oneyear Malaysian government treasury plus assumed equity risk premium. Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. As of Tuesday, January 9, 19, the analyst, Tan Kam Meng, who prepared this report, has interest in the following securities covered in this report: (a) nil Kaladher Govindan Head of Research TA SECURITIES HOLDINGS BERHAD (14948M) A Participating Organisation of Bursa Malaysia Securities Berhad Menara TA One Jalan P. Ramlee 5050 Kuala Lumpur Malaysia Tel: Fax: Page 7 of 7