AirAsia’s poor 2Q earnings raise concerns

by SULHI KHALID/ pic by BLOOMBERG

AIRASIA Group Bhd’s dismal second-quarter (2Q) performance came in well below market expectations and analysts warned of tough financial periods ahead for the carrier due to the new accounting rules.

The low-cost carrier suffered a 95% year-on-year (YoY) fall in net profit to RM17.94 million in the quarter, despite revenue growing 17% YoY to RM3.02 billion on increase in total passengers to 12.8 million during the period.

MIDF Research equity analyst Adam Mohamed Rahim noted that the substantial increase in finance costs following the Malaysia Financial Reporting Standard 16 (MFRS16) adoption, coupled with higher maintenance expenses, have weighed on the airline’s earnings for the quarter.

“The adoption of MFRS16 will be a headwind in the coming years as the majority of AirAsia’s fleet are leased.

“Nonetheless, the airline is expected to gain from a lower amount of interest beyond the fifth year of the lease term,” he said in a research report yesterday.

MIDF believes the group experienced a rise in operating expenditure, partly due to the 15.5% YoY increase in aircraft fuel expenses amid capacity expansion in the first half of this year.

“AirAsia older fleet will be replaced with the new A320neo and A321neo in November 2019. These aircraft have advanced fuel-efficient technology which will lead to an estimated fuel savings of 15% by financial year 2020 (FY20), translating into lower cost per seat as it has 50 additional seats,” MIDF noted.

It has revised its target price (TP) for AirAsia to RM2.08 per share following the downward revision in its earnings forecast.

Prudent hedging policy, stable operations with added capacity and continuous improvement to derive higher values per kilometre flown are expected to drive growth for the low-cost airline, MIDF added.

“We (foresee) that passenger growth in Malaysia to remain intact despite the departure levy which is expected to take effect in September 2019 as the levies gazetted are lower than regional peers such as Thailand and Hong Kong,” it said.

Echoing a similar view, Public Bank Investment Bhd analyst Nur Farah Syifaa’ Mohamad Fu’ad reduced the TP for the carrier to RM1.89 and reduced its earnings forecasts for FY19-FY21 by an average of 24%.

Commenting on the airline’s fuel hedging status, Nur Farah Syifaa’ highlighted that the group has hedged 65% of Brent crude at US$63 (RM265.23) for FY19, and hedged 73% of its requirement for FY20 at US$60 and 19% for FY21 at US$59.

The group has targeted a net fleet growth of 20 aircraft this year across its air operator certificate. It is also focusing on reorganising its corporate structure into three businesses — airlines, AirAsia.com and RedBeat Ventures (eg Teleport, BigPay, Santan/T&Co, AirAsia Big loyalty).