“Capital A is very much alive and flying despite lingering uncertainties”

CAPITAL A Bhd’s (formerly AirAsia Group Bhd) return to profitability is expected to be delayed by a year to FY2024E in view of slower-than-expected re-deployment of aircraft although higher fares and lower lease rates have more than compensated for the weaker ringgit and still high oil prices.

Although this has prompted Maybank IB Research to slash the sums-of-part (SOP) target price of the budget airline operator to 84 sen (from RM1.29 previously), Capital A still offers  more than 30% upside potential.

“First, fares have not only remained high but climbed even higher in 2Q FY2022,” observed analyst Yin Shao Yang in a company update.

“In fact, IAA’s (Indonesia AirAsia) average fare/stage length hit a new record in 2Q 2022. Many airlines cut supply during the COVID-19 pandemic and this translated into higher fares after demand started recovering in the current post-COVID-19 world.”

Moreover aircraft lease rates are also meaningfully lower in the current post-COVID-19 world with Maybank IB Research estimating that Capital A stands to save a whopping RM860 mil per annum.

Nevertheless, the research house listed down four impending challenges for Capital A:

  • The ringgit has weakened past RM4.50 against the greenback when US dollar denominated expenses traditionally accounted for 60%-70% of expenses;
  • Jet fuel prices remain relatively high (fuel traditionally accounted for 30-50% of expenses);
  • Backlogs at MRO (maintenance repair and operations) service providers have delayed the re-deployment of aircraft;
  • There is still no clarity as to when China – a major source of passengers – will lift its zero COVID-19 policy and allow it citizens to travel freely again.

“(As such), we widen our FY2022E core net loss (of Capital A) from RM2.44 bil to RM2.89 bil while now forecast (its) FY2023E core net loss of circa RM700 mil versus core net profit of circa RM250 mil previously, and trim our FY2024E net profit by circa RM100 mil to RM268 mil,” projected Maybank IB Research.

“Our revised FY2024E net profit forecast of RM268 mil is similar to our previous FY2023E net profit forecast of RM254 mil. Essentially, we now expect Capital A’s return to profitability to be delayed by a year only due to the slower-than-expected redeployment of aircraft.”

Elsewhere, the research house said Capital A has also assured investors/shareholders that there will not be another rights and/or debts to be converted into new shares.

At 12.02pm, Capital A was unchanged at 63 sen with 780,100 shares traded, thus valuing the company at RM2.62 bil. – Sept 29, 2022


Main photo credit: Reuters

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