AirAsia downgraded to Reduce by CGS-CIMB as earnings miss forecast

Singapore Changi Airport Terminal 4 departure boardSingapore Changi Airport Terminal 4 departure board

CGS-CIMB downgraded AirAsia Group to Reduce from Hold after earnings missed forecasts.

AirAsia reported on Thursday that its third quarter net profit rose to 915.88 million ringgit from 505.33 million ringgit in the year-ago period. For the nine-month period through 30 September, the carrier reported net profit rose to 2.42 billion ringgit from 1.27 billion ringgit in the year-ago period.

The brokerage said the nine-month core net profit of 563 million ringgit was only 60 percent of its previous full-year forecast, and despite seasonal fourth-quarter strength, the results were 25 percent below its expectation.

“This was due to excessive capacity expansion in Malaysia, the Philippines and India, causing loads to fall, while oil prices and the U.S. dollar were strong,” CGS-CIMB said in a note on Friday.

The brokerage said the outlook for the carrier would remain challenging, forecasting oil prices would remain high. It said it also expected higher airport taxes and a new aviation levy from mid-2019 could force Malaysian AirAsia to lower its base fares to prevent “demand destruction.”

The AirAsia Group’s 24 plane deliveries next year, after the 27 in 2018, may also increase the regional overcapacity, CGS-CIMB said.

The brokerage also said that while it expected special dividends would keep investors invested in the shares, the quantum was lower than it had projected. The carrier declared a special divided of 40 sen, compared with the brokerage’s forecast for 91 sen.

“We think AAGB may be spreading out the special DPS payments in order to encourage investors to remain in the stock,” it said, adding it expected another special dividend of 30 sen with the release of fourth quarter results. “We think AAGB may need to conserve cash in a tough
operating environment.”

CGS-CIMB cut its AirAsia target price to 2.12 ringgit from 2.72 ringgit as it lowered its core earnings per share forecasts from 2018-2020 by 21.4 percent to 27.4 percent.

To be sure, AirAsia was somewhat upbeat about its outlook for the fourth quarter.

“The fourth quarter of 2018, the operating environment is seen to have improved as compared to the third quarter, coupled by the year-end holiday season being around the corner, the group load factor is holding strong. The overall average fares have also gone up year-on-year,” the carrier said in the results release.

“All airline operators’ profitability have been affected by the higher global fuel prices this year,” it added.

The stock is up 1.30 percent at 3.12 ringgit at 12:29 P.M. SGT.

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