CIMB Research retains Reduce for AirAsia, TP RM1.82

The five aircraft are leased to third party airlines with an estimated enterprise value of US$173.67mil.

KUALA LUMPUR: CIMB Equities Research retains Reduce for AirAsia Group with an unchanged target price of RM1.82, based on sector average of CY20F P/E of 10 times and adding expected dividends of 31 sen.

It said on Thursday the FY18 core net profit of RM166m underperformed its forecast by 78%, as it was already the lowest on the street, due to the shock 4Q18 core net loss.
“The 4Q18 loss was caused by higher oil prices, but also higher leasing and maintenance costs as a direct consequence of the BBAM transaction. Stay Reduce,” it said.
 
AirAsia Group reported a RM369m core net loss for 4Q18, its largest-ever quarterly loss, which dragged down FY18 core net profit to only RM166m, down 87% yoy. 

The last time AirAsia Group reported quarterly losses of any materiality was during 2014, when oil prices were high and when Malindo’s entry into the Malaysian airline scene triggered intense competition.

“While jet fuel prices were indeed high in 4Q18 at US$92/bbl, they were still a distance from the US$120-130/bbl seen during 2014. The key difference in 2018 vs. 2014 is that only 40 of AAGB’s group fleet of 224 planes were owned as at 31 Dec 2018 while only 20 of AirAsia Group’s group fleet of 171 planes were leased as at 31 Dec 2014. 

“The own-to-lease ratio has flipped on its head and the consequences of that were intensely felt in 4Q18,” it said.

AirAsia Group progressively sold 79 aircraft to lessor BBAM over 2018, used the proceeds to repay aircraft loans and then leased the planes back. 

This increased leasing charges by more than the reduction to depreciation and interest expense, an outcome the research house already more or less expected, since lessors need to earn a profit on their business.

However, maintenance charges were also significantly higher in 4Q18 than in previous quarters because the conditions for lease return required AAGB to make provisions for them. Hence, AirAsia Group beefed up its provisions by RM100m in 4Q18. 

“Going forward, maintenance provisions will not be as high as in 4Q18 but should still be higher than before the sale and leaseback (S&LB) transaction with BBAM took place. All else being equal, the squeeze on AirAsia Group’s profitability will continue to get tighter since a substantial number of AirAsia Group’s orderbook with Airbus has been committed for subsequent S&LB with BBAM. 

AirAsia Group recently signed a deal with another lessor, Castlelake, to S&LB a further 25 planes (and four planes on the orderbook). The main benefit of S&LB transactions to shareholders is the resulting special dividend but future profit margins of AirAsia Group will come under pressure and its risks/operating leverage will increase.

“With lower profitability, AirAsia Group will be less resilient to unexpected changes in the business environment. MAS and Malindo started to increase domestic capacity in 1Q19F (after shrinking in 2018) so the competitive dynamics may get tougher. 

“The new airport levy and likely passenger service charge increase in mid-2019F are expected to hurt travel demand in Malaysia, potentially requiring AirAsia to subsidise these rate hikes. Finally, competition in Thailand, the Philippines, Indonesia and India has intensified, driving all of AirAsia Gr oup’s overseas airline affiliates to 4Q18 losses and hurting their FY19F outlook,” it said.