AirAsia Group (AAGB) recorded a net loss in the fourth quarter of 2018 (4Q), its first quarterly loss in more than three years on the back of higher cost.  The low cost airline reported a 4Q net loss of RM457M, versus a net profit of RM434M in the same quarter a year ago.  For the full financial year, net profit rose 8.9% to RM1.71B from RM1.57B in FY17.
 
Read on as Macquarie Equities Research (MQ Research) breaks down the results.
 
 
 
Event
 

• AAGB’s 4Q18 results were a big miss, with FY18 adjusted net profit (AP) 22%/25% of MQ Research’s/street’s expectations.

 
 
 
Impact
 

• Across the board, the 4Q was a poor showing operationally. Headline revenue per available seat-kilometer (RASK) contracted 4% year-on-year (YoY) to 14.82sen despite a 14% increase in available seat kilometer (ASK) as a result of tight competition that cut average fares 6%. While the hit on the fuel costs was expected (+30% YoY to 6.23sen/ASK), non-fuel cost also rose (+25% YoY to 10.35sen/ASK). Even after stripping out several one-offs (including higher user charges from the transfer of eight aircraft from IAAX to AirAsia Indonesia), ex‑fuel cost per available seat-kilometer (CASK) was up +4% YoY.

• Management is guiding to 1Q19 forward load factors +1ppts to 85% (4Q18: 84%) as well as to a marginal improvement in yields. MQ Research believes both will be difficult to improve given the ongoing capacity adds.

• MQ Research believes cost will continue to be AAGB’s biggest hurdle in FY19. MQ Research sees some relief short-term for fuel costs as jet inventories are building in the United States. Management will also hedge more in FY19, with 52% hedged at US$63.41 Brent. While cheaper, AAGB remains exposed to jet cracks. MQ Research anticipates limited hedging upside, with 1/2/3/4Q brent forecasts of US$51/61/63/60/bbl.

• On the non-fuel front, management has a few cost-cutting initiatives lined up, including 1) -10% headcount rationalisation and 2) closing call centers (replaced with automation). But with higher costs being incurred by the group’s non-aviation segments (eg, BIGpay), we anticipate cost savings will be marginal.

• A 12sen second interim dividend was declared, and management made it clear that no additional dividend would be paid with regards to the BBAM sale and leaseback (40sen special dividend has already been paid). The Castlelake sale and leaseback is expected to be completed by 2Q19, with potential for another (albeit smaller) special dividend.

 
 
 
Action and recommendation
 
Results were a big red surprise, with the operational outlook turning challenging. The only positive item MQ Research took away from the call was AAGB’s growing market share (+4ppts to 20% in Philippines, +6ppts to 58% in Malaysia), which MQ Research believes positions the airline well into 2019, when MQ Research expects fuel costs to be more manageable. But with another 11% capacity to be added in 2019 on 11 aircraft deliveries, MQ Research are cautious on both yields and load factors going forward. MQ Research places their investment opinion on AAGB under review.
 
 
 
12-month target price methodology
 

• RM5.00 based on a EV/EBITDAR methodology

 
 
 
Exposure to AAGB via warrants
 
With volatility expected in AAGB’s share price today, investors who are keen to gain a leveraged exposure to AAGB may consider AIRASIA-C77.  AIRASIA-C77 has an exercise price of RM3.40 and a high effective gearing of 4.7x.  This means, with all else constant, AIRAISA-C77 will move approximately 4.7% for every 1% move in the underlying shares. 

 

AIRASIA-C59, AIRASIA-C68 and AIRAISA-C69 are also issued by Macquarie but are expiring over the next 1-2 months.  Macquarie has widened the offer price of these warrants to prevent buying into a short-dated warrant which, in theory, will decay at a faster rate.
 
In addition, AIRASIA-C72 and AIRSIA-C74 are deep in-the-money (ITM) with exercise prices of RM2.518 and RM2.171 respectively.  Deep ITM warrants are usually expensive, with low gearing.  Macquarie has also widened the offer price to discourage further buying. 
 
Do note that for these warrants, the bid prices will continue to track the underlying closely, ensuring that existing warrant holders will not be at a disadvantage.

https://www.malaysiawarrants.com.my/marketnews/highlight?cat=todayhighlight&id=4921