AirAsia Group: Impressive cashflow generation & market share gains even as fuel constituted 42% of costs in 2Q18

AirAsia company logo

AirAsia Group Bhd (5099.KL)

Price Target: M$4.70 | Rating: Buy

30 August 2018, Malaysia - AirAsia Group (AAGB:MK)’s 2Q18 financial results beat ours and market expectations. We believe the stock is oversold; valuations look attractive at 7.3x P/E and 1.3x P/B on our more conservative forecasts and present a good buying opportunity when oil prices and the Malaysian ringgit stabilize.

Here are our key takeaways from the results:

#1 Notwithstanding the 28% y/y increase in fuel costs which accounted for 42% of its total operating costs and its limited fuel hedging, AirAsia Group’s net operating profit (after net finance costs) fell only 18% y/y to M$325m in 2Q18, implying a net operating profit margin of 12.4% (down 4ppts y/y), outperforming the Asian airline sector’s financial results. Operating cash flow rose 23% y/y during the quarter.

#2 AirAsia Group’s net profit actually rose 147% y/y to M$315m in 2Q18 due to the low base last year owing to a substantial M$318m deferred tax charge versus a deferred tax writeback of M$47m this year. Pre-tax profit fell 29% y/y to M$275m, mainly driven by M$49m losses from associates and M$15m fair value losses from derivatives.

#3 AirAsia Group gained market share in nearly all its domestic markets during 2Q18 – Malaysia 57% (+5ppts y/y), Thailand 35% (+4ppts), Philippines 22% (+7ppts), India 5% (+1ppt), Indonesia 2% (steady).

Chart: AirAsia Group – Market Share on Domestic Routes (2Q18 versus 2Q17)

AirAsia Group: Market Share on Domestic Routes (2Q18 versus 2Q17)

#4 AirAsia Malaysia was the star of the results, contributing a net operating profit of M$205m, down only 8% y/y in 2Q18. AirAsia Malaysia’s non-fuel unit cost fell 8% y/y while its average fare rose 6% y/y in 2Q18.

#5 AirAsia Philippines was also profitable notwithstanding the higher fuel cost and weaker peso, contributing a net operating profit of PHP51m.

#6 AirAsia Thailand, AirAsia Indonesia, AirAsia India and AirAsia Japan incurred losses during the quarter. Management expects AirAsia Thailand’s performance to improve meaningfully from 4Q18 while AirAsia India will break even in 2019. Both AirAsia India and AirAsia Japan are expected to turn profitable in 2020 but we expect both carriers to require another round of capital injection to fund their expansion in the next 12 months.

#7 Special dividends are likely in 2H18 following the receipt of US$501.6m for the transfer of 39 aircraft as at 8 August 2018, with another 45 more aircraft scheduled to be transferred by November 2018.

#8 Key risk is AirAsia Malaysia’s aggressive expansion of 12% which may undermine the Group’s profitability in 2H18. This underpins our more conservative forecasts for AirAsia Group compared to Street estimates.

Chart: AirAsia Group – Aircraft Fleet Growth (2018)

AirAsia Group: Aircraft Fleet Growth (2018)

Note: Stocks with upside of more than 10% based on our fair value are assigned an Outperform rating. Stocks with downside of more than 10% based on our fair value are assigned an Underperform rating. Stocks with upside or downside of less than 10% based on our fair value are assigned an In-line rating. These are Crucial Perspective’s proprietary rating classifications and by no means serve as investment recommendations.

Independent Research Declaration: Crucial Perspective does not own any position in the equities featured in this report nor have we received any compensation for writing this report.


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