Strong air travel demand to push up AirAsia’s yield and ancillary income
28 May 2018
AirAsia Group Bhd
(May 25, RM3.22)
Maintain buy with a lower target price (TP) of RM4.65: AirAsia Group Bhd (AAG) reported a core profit after tax and minority interest (Patmi) of RM346.9 million, achieving 18.7% of Hong Leong Investment Bank’s (HLIB) financial year 2017 (FY17) forecast and 22.1% of consensus, after excluding the disposal gain of RM350 million for Ground Team Red Malaysia (GTR) and remeasurement gain of RM535 million for Asia Aviation Capital Ltd (AAC). First quarter usually contributes around 20% to full-year profit (due to weak seasonality). As such, we deem first quarter of 2018 (1QFY18) results to be below expectations given the continuous rise in jet fuel cost to above US$90 (RM358.2) per barrel year to date and increasing cost structure which would impact its margin for upcoming quarters. AAG declared a net interim dividend of 12 sen per share.
Quarter-on-quarter, core Patmi declined by 9.1%, affected by seasonally lower yield and ancillary income; and higher jet fuel cost. Nevertheless, this was partially offset by stronger associate contribution (mainly from Thai Air Asia [TAA]) and lower net financing cost.
Year-on-year, Core Patmi increased by 19.4% attributed to higher associate contribution from TAA; and higher core loss attributed to minority interest of Indonesia AirAsia (IAA), following Mt Agung’s eruption affecting IAA operation in 1QFY18.
Management expects yield and ancillary income to improve towards second half of 2018 (2HFY18) given the strong regional air travel demand. However, the increase in jet fuel price will increase AAG cost structure. Management will focus on improving its operational efficiency and reduce non-fuel cost/unit while improving yield and ancillary income to offset the higher jet fuel cost. AAG will hedge its jet fuel cost requirement in tandem with the percentage sales of total available seat capacity.
Despite the closure of Boracay island for six months from end April 2018, the management reallocated traffic to other Philippines destinations. — Hong Leong Investment Bank Research, May 25