Review

• Excluding forex loss of RM436mn and other exceptional items, Capital A’s 1H24 core profit of RM213.9mn came in below our expectation but within consensus forecast. The variance was largely due to higher-than-expected fuel cost.

• The sequential growth in demand (RPK) for the last two quarters signified a sustained recovery, alongside commendable load factor. In 2Q24, all operating units achieved strong loads of approximately 90% with added capacity (2% QoQ, 8% YoY) intended to meet the overwhelming demand (1% QoQ, 12% YoY) (Figure 1-4). Malaysia AirAsia (MAA) was the best performer with decent ASK (10% QoQ, 15% YoY) and RPK (8% QoQ, 18% YoY) growth. We attribute this to visa-free entry implemented in Malaysia, China and India.

• However, in terms of yield, the CASK (cost/ASK) was little changed at 23.2sen while the RASK (Revenue/ASK) experienced a seasonally decline of 7.8% QoQ to 22.5sen, which resulted in a negative spread of 0.7sen in 2Q24. The relatively high CASK was due to stubbornly high jet fuel price (USD111/barrel), which exacerbated by strong dollar versus Capital A’s operating currencies.

• The non-aviation segment (Teleport, Capital Aviation Service and Move Digital) reported a slight decline in EBITDA of RM41.3mn (-5% QoQ) amid stable revenue of RM617.7mn. The decline came mainly from Teleport and Aviation Service segments.

• All in, Capital A reported another quarter of EBITDA positive at RM706.4mn (adjusted for EI) with a whopping RM1.2bn operating cash flow in 2Q24. However, due to the lumpy forex loss of RM436mn, the deficit shareholders’ funds expanded to 9.1bn from 9.0bn in the preceding quarter.

Impact

• We cut FY24 earnings projections by 22.4% but leaving FY25-26 forecasts largely unchanged after revising FY24 fuel cost assumption higher by 5% and FY25-26 ringgit assumption to RM4.30/$ (from RM4.50).

Outlook

• The amendments to replace AirAsia Group (AAG) with AirAsia X in the supplemental agreements signed in April (refer to reported dated 26 April) is expected to expedite the restructuring process. Recently, Capital A obtained approval from Bursa Malaysia on an extension of time to 31 December 2024 to submit the regularisation plan. It has submitted the EGM circular to Bursa Malaysia.

• Besides that, the issue of revenue bond worth USD443mn would provide financial agility to the group, which we think is important as its PN17 status has hindered the group from equity fund-raising.

• Operationally, management is upbeat about 2H24 and expect the profit growth to come from: 1) additional capacity, 2) appreciation of ringgit, and 3) moderation in oil price. Key focus would be bringing the cost down significantly.

Valuation

• As the risk of trading suspension still lingers, we reiterate our Hold recommendation on Capital A. The target price is revised to RM0.87/share (from RM0.96), pegging a 50% discount to its fair value of RM1.74/share based on revised 8.0x CY25 EPS.

Source: TA Research - 30 Aug 2024