This article first appeared in The Edge Financial Daily on May 31, 2019 - June 6, 2019

AirAsia Group Bhd
(May 30, RM2.85)
Downgrade to hold with a lower fair value (FV) of RM2.97: Our revised FV is based on eight times post-special dividend financial year 2020 forecast (FY20F) earnings per share (EPS) plus a 90 sen special dividend, to be distributed in August 2019. We had previously valued AirAsia Group Bhd at 10 times FY20F EPS. The reduced price-earnings (P/E) multiple is to reflect AirAsia’s higher risk premium with an increased net gearing after the special dividend. AirAsia’s much larger global peers Ryanair and Southwest Airlines trade at an average forward P/E of 11 times.

AirAsia’s core net profit of RM104.6 million for the first quarter of financial year 2019 (1QFY19) missed expectations, at only 11% of our full-year forecasts and consensus estimates respectively. The variance against our forecasts came largely from higher operating costs, specifically maintenance and overhaul costs up 64% year-on-year (y-o-y) on more maintenance provisions provided for the higher number of leased aircraft. However, its top line grew 13% y-o-y underpinned by an 18% increase in total passengers carried backed by a 17% expansion in capacity.

Key highlights from a briefing yesterday are on the digital aspect. The group has shown encouraging growth. Its non-airline earnings before interest, taxes, depreciation and amortisation turned profitable at RM39 million compared to a loss of RM7 million for 1QFY18, translating into seven times growth y-o-y, mainly contributed by Teleport, managing the aircraft freight belly space, recording a revenue of RM101 million, in line with its revenue target of RM400 million this year. It is targeting to launch social commerce enabler teleport.social in 2019.

We believe AirAsia’s key strategy is to aggressively grow its top line to mitigate a higher cost structure arising from its planes, now largely leased versus owned previously. We believe AirAsia remains a good proxy to the growing low-cost air travel market in the region, underpinned by rising per capita incomes and a young demographic.

Its strong market presence, in the number of routes and frequencies for each route, enables it to compete effectively against rivals in the low-cost and full-service categories. It also struck a chord among investors with its plans to monetise some of its auxiliary businesses and assets, translating into special dividend payouts to shareholders. — AmInvestment Bank, May 30