This article first appeared in The Edge Financial Daily on October 24, 2019

AirAsia Group Bhd
(Oct 23, RM1.86)
Maintain buy with an unchanged target price (TP) of RM2.08: In the third quarter of financial year 2019 (3QFY19), the available seat kilometres (ASK) of consolidated air operator certificates (AOCs) (Malaysia, Indonesia and the Philippines) of AirAsia Group Bhd (AAGB) increased by 16% year-on-year (y-o-y) to 19.024 billion compared to a 10% y-o-y growth in 3QFY18. The improvement in ASK was partially attributed to network expansion via a strategic addition of new routes and increased frequencies of both domestic and international routes for AAGB’s AOCs.

The expansion in revenue passenger kilometres (RPK) by 18% y-o-y in 3QFY19 outpaced the 16% y-o-y ASK expansion. As such, the load factor in 3QFY19 remained robust at 84%, two percentage points higher than a year ago. We believe this was underpinned by a series of long weekends in Malaysia, particularly in September 2019, which boosted 3QFY19’s number of passengers by 20% y-o-y to another record high of 13 million. Overall, the number of passengers carried in the first nine months of FY19 (9MFY19) grew by 18.7% y-o-y to 38.4 million.

Of the three AOCs, Malaysia was the largest contributor of passengers carried in absolute terms in 3QFY19, with an increase of 900,000 passengers. In percentage terms, Indonesia recorded the largest growth in passengers carried at 66% y-o-y.

Thai AirAsia (TAA) remained resilient despite the low peak season amid a 19% y-o-y surge in Chinese tourists visiting Thailand in August. As such, the load factor remained strong at 81% in 3QFY19 with both RPK and ASK increasing by almost the same rate. In 9MFY19, total passengers carried by TAA increased by 4.1% y-o-y to 16.7 million. We expect growth in passengers to continue, supported by the extension of free visas on arrival for visitors from China and India beyond October 2019 to April 2020.

We make no changes to our earnings estimates. Our TP is derived by pegging our FY20 forecast earnings per share of 18.9 sen at an unchanged target price-earnings ratio (PER) of 11 times. The target PER is premised on AAGB’s regional peers which are trading at a 12-month trailing PER of 11 times on average.

We continue to like AAGB as the company continues to enhance its cost structure, along with efforts to rationalise revenue and cost via digitalisation efforts. Our positive outlook also hinges on its more prudent hedging policy, stable operations with added capacity, and continuous improvement to derive higher values per kilometre flown. Meanwhile, the adoption of the Malaysian Financial Reporting Standards 16 will be a headwind in the next coming years as the majority of AAGB’s fleet are leased. Nonetheless, AAGB is expected to gain from a lower amount of interest beyond the fifth year of the lease term. We opine that passenger growth in Malaysia will remain intact despite the departure levy which took effect in September 2019, as the levies gazetted are lower than regional peers such as Thailand and Hong Kong. As for low-cost carriers such as AAGB, the percentage of departure levy to the total ticket price is still immaterial at around 1.6% on average for normal fares. — MIDF Research, Oct 23