Ahead of low cost carrier AirAsia Group’s (AirAsia) 3Q18 results this Thursday, Macquarie Equities Research (MQ Research) reiterates their Outperform rating on AirAsia, with an unchanged target price of RM5.00. MQ Research’s focus remains on aircraft monetization updates post transaction completion. AirAsia’s share price closed up 5.5% to RM3.05 yesterday.

Conclusion

• MQ Research reiterates their Outperform rating on AirAsia Group, with an unchanged target price of RM5.00 ahead of 3Q18 results due 29 Nov. While lower year on year (YoY) profits are expected – cost outpacing revenue and loss-making Thai associate – MQ Research’s focus remains on updates on aircraft portfolio monetisation.
• All aircraft planned for disposal save for five aircraft leased to third party airlines have been transferred to buyer in early November with gross proceeds of US$1.1bn, 47% of current market cap. MQ Research’s expected 75 sen special dividend could see upside risk given the recent Ringgit weakness.

Impact

• Weak 3Q18 expected on fuel headwinds and loss-making Thai associate. MQ Research expects AirAsia Group to report an adj PATAMI of RM220m, down 51% YoY. Revenue expected to increase 9% but cost outpacing revenue growth at 21% YoY on 44% higher fuel bill. Thai AirAsia also should swing into losses given weak demand amid a higher cost environment.
• MQ Research thinks demand is better in the consolidated entity. MQ Research expects AirAsia Group to show better operating dynamics in 3Q18 vs the other AirAsia entities that have reported results as MQ Research thinks demand is more resilient in the short-haul segment out of Malaysia, the Philippines and Indonesia. MQ Research believes Thailand is facing overcapacity while a weakening Ringgit is negatively impacting the long-haul segment for outbound Malaysia.
• Weaker quarter on quarter (QoQ). While 3Q traditionally is a stronger quarter than 2Q, MQ Research expects 28% PATAMI QoQ decline on combination of 4% QoQ ringgit weakness, 4% higher QoQ fuel price and mild QoQ enlarged losses from Thai AirAsia.

Earnings and Target Price Revision

• FY18-20E earnings per share (EPS) tweaked -2.6% to +1.9% based on latest fleet plan and macro conditions. Target price is unchanged at RM5.00.

Price Catalyst

• 12-month price target: RM5.00 based on an EV/EBITDAR methodology.
• Catalyst: 3Q18 due 29 Nov, special divs, more newsflow on digital ventures

Action and Recommendation

• Outperform reiterated.

Source: Macquarie Research - 27 Nov 2018