WHILE operating statistics saw positive trend in 2Q 2022 on all its four operating markets (Malaysia, Indonesia, Thailand and the Philippines), Capital A Bhd (formerly AirAsia Group Bhd) will likely face fuel headwinds, which may compound margins weaknesses.
According to UOB Kay Hian Research, jet fuel prices, which usually command about 20%-30% of airlines’ operating costs, have been surging as much as over 100% year-to-date (YTD) by having exceeded US$175/barrel in 2Q 2022 before retracing back to about US$138/barrel currently.
“We deem that this sustained high fuel prices may put upward pressure on AirAsia’ airline costs but will be partially buffered by higher fares,” projected analyst Jack Goh in an aviation sector update.
“Our channel checks revealed that AirAsia re-introduced fuel surcharge for all its domestic and international flights to transfer the cost to end-consumers in 2Q 2022 in order to offset the incremental fuel costs.”
As a whole, UOB Kay Hian Research retained its “hold” rating on Capital A with an unchanged 2023 SOP (sum-of-parts)-based target price of 72 sen.
“Despite meaningful earnings recovery from 2Q 2022 onwards, our forecast for Capital A is deliberately conservative as we have yet to factor in the full potential of steep earnings turnaround in 2023-2024,” justified the research house.
“Our concern also lays in the group’s Practice Note 17 (PN17) status which might continue to impact investors’ sentiment.”
To re-cap, Capital A is classified as a PN17 company due to its negative shareholders fund (-RM1.04/share as of 1Q 2022).
“While the group is in the midst of formulating a plan to address the PN17 status, we believe that investors’ sentiment will likely remain impacted until this is resolved,” UOB Kay Hian pointed out.
“The deadline for submission to Bursa is on Jan 6, 2023. Meanwhile, we are forecasting that Capital A will be able to turnaround its negative shareholders fund in 2024-2025 based on our earnings projections.”
As opposed to Capital A, the research house has reiterated its “buy” call on Malaysia Airports Holdings Bhd (MAHB) with an unchanged target price of RM7.52 by valuing the airport operator’s Malaysian operations at 10 times 2023 earnings before interest, taxes, depreciation, and amortisation (EBITDA).
“In a blue-sky scenario that passenger service charge (PSC) was revised upwards by 4%-5% in the new operating agreement (OA) and passenger traffic returning to pre-pandemic levels, our target price could be as high as RM8.08,” added UOB Kay Hian Research.
At 12.20pm, Capital A was up 1 sen or 1.6% to 63.5 sen with 1.83 million shares traded, thus valuing the company at RM2.64 bil. – Aug 3, 2022
