KEY INVESTMENT HIGHLIGHTS

• 3QFY24 posted an unexpected loss
• 77% fleet utilisation drove 81% seat capacity recovery
• ADE's profitability hit by startup costs
• Downward earnings revision between -39% to -214%
• Downgrade to NEUTRAL with a revised TP of RM0.99

Below expectations. Capital A Berhad (Capital A) reported a 3QFY24 core LATAMI of -RM545.7m, bringing cumulative 9MFY24 core losses to -RM324.7m after excluding forex gains and one-off items. This fell below our and consensus expectations, which had anticipated a full-year profit, primarily due to higher-than-expected operating expenses (opex) and weaker contributions from non-aviation entities.

Quarterly. EBIT surged by +90.3%yoy, driven by increased capacity (+8.2%yoy), strong load factors, and improved yields. With 77% of its aircraft in operation, the airlines (excluding Cambodia) recovered 81% of their seat capacity, achieving an average load factor of 89%. Yield improved as RASK increased by +6.6%yoy, while CASK declined by - 4.4%yoy, supported by easing jet fuel prices. Capital A disclosed segmental gross PAT for the first time, revealing that Teleport, ADE, and BigPay reported losses in 3QFY24. ADE's profitability was notably impacted by increased staff costs to support its expanded capacity.

Compared to 2QFY24, EBIT declined by -34.4%qoq, primarily due to the seasonally weaker quarter for the aviation business and the underperformance of non-aviation entities.

Outlook. Capital A anticipates a strong performance in 4QFY24, projecting passenger traffic to recover to 88% of pre-pandemic levels, supported by an 84% capacity restoration. The Group plans to launch 18 new domestic and international routes to meet the growing demand from India and China, where it reportedly holds over a 50% market share in the latter. The fleet expansion strategy for 4QFY24 includes the delivery of 5 additional aircraft with 4 allocations to Malaysia AirAsia (MAA) and 1 to Thai AirAsia (TAA). By end-FY24, the plan is to have 205 aircraft, comprising 195 available operational aircraft (+14.7%qoq).

Downgrade to NEUTRAL. After factoring in higher opex and slight downward adjustments to seat capacity recovery and load factor assumptions, aligned with 9MFY24 operating statistics, we have lowered our earnings projections for FY24F/FY25F/FY26F by -214%/-39%/-44%.

Consequently, as we roll over our valuation base year, we have adjusted our target price to RM0.99 (from RM1.06), based on 8.5x PER. Given that the share price has increased by +33% year-to-date, now trading slightly above its pre-COVID mean at 9.4x FY25F EPS, we have downgraded our call to NEUTRAL from BUY.

Source: MIDF Research - 29 Nov 2024