Review

• Excluding exceptional items such as forex loss of RM364mn, impairment loss of RM7.7mn and other exceptional items, Capital A’s 1Q24 core profit of RM268.1mn beat market expectations. The variance was largely due to stronger-than-expected performance of Thai AirAsia (TAA) and higher-thanexpected airfare.

• The group’s 1Q24 demand (RPK) outgrew the capacity (ASK) with RPK growth of 5% QoQ versus ASK growth of 1% QoQ. Specifically, the 5% QoQ growth in RPK against the seasonally peak travel demand in fourth quarter was astonishing. All operating airlines registered positive growth QoQ and YoY (Figure 1 – 4) with an average load factor of 89% in 1Q24m. All these signified a sustainable recovery in airline operations thanks to visafree entry implemented in Malaysia and China.

• In terms of yield, 1Q24 RASK (Revenue/ASK) continued on the rise, up 6.2% QoQ for AAGB and 7.2% QoQ for TAA. Meanwhile, 1Q24 CASK (Cost/ASK) moderated by 2.6% QoQ for AAGB and increased marginally 3.6% QoQ for TAA. The strong fare was due to increased tourist arrivals from China and India, increase in transit passengers and strong domestic travelling in Malaysia and Thailand.

• The non-aviation segment (Teleport, Capital Aviation Service, Move Digital) reported lower EBITDA of RM129.7mn (-66% QoQ) amid lower revenue of RM616.6mn (-3% QoQ). The decline came mainly from AirAsia Move due to heightened price competition and changes in recognition of travel agent fees.

• All in, Capital A achieved its sixth consecutive quarter of EBITDA positive at RM708.9mn (adjusted for EI) with decent amount of RM789mn operating cash flow in 1Q24. However, due to the lumpy forex loss of RM364mn, the deficit in shareholders’ funds expanded to RM9.0bn from RM8.7bn in the preceding quarter.

Impact

• We are doubling our FY24 earnings projections after revising the RASK higher and reducing the CASK for all operating airlines due to stronger-thanexpected fare and moderation in oil price. We also factor in a stronger load factor for Malaysia AirAsia (85%) and TAA (90%). We also upgrade FY25 earnings by 71%.

Outlook

• One month after the announcement of proposed airline disposal exercise, there has been little progress from both Capital A and AirAsia X, in terms of obtaining shareholders’ approval. Having said that, the company is confident of getting shareholders’ approval by 3Q24 and complete the regularisation plan execution by 4Q24.

• Operationally, management is upbeat about on 2024 and expect the profit growth to come from: 1) strong air-travel demand and Capital A has ample flight capacity to cope with the demand growth, 2) rise in ancillary income, and 3) moderation in oil price, and 4) ringgit strengthening.

Valuation

• Capital A shares have reacted positively to the restructuring announcement, as the market believes the company can eventually be lifted from the PN17 status if all goes well. We reiterate our Hold recommendation on the stock while awaiting shareholders’ approval from Capital A and AAX. Capital A’s target price is raised to RM0.96/share, pegging a 30% discount to its fair value of RM1.37/share based on revised 8x CY24 EPS. The 30% discount is justifiable as there are many requirements that need to be satisfied in the restructuring exercise.

Source: TA Research - 30 May 2024