AirAsia Q2 performance below forecast, Maybank IB Research says


KUALA LUMPUR: Maybank Investment Bank Research has downgraded AIRASIA Group Bhd (AAGB) to Sell from Hold as short-term challenges mount, citing the current competitive environment as brutal and there is no clarity when the situation will improve.

It said on Thursday the 2Q19 losses were atypical as 2Q is seasonally the second strongest quarter of the year.

The research house pointed out yields held up year-on-year (YoY), but costs soared due to higher maintenance provisions and share of associate losses that was previously not recognised.

“These aside, the underlying performance is weaker than our expectation and it’s unlikely to improve anytime soon. We slash our FY19-20E core net profit by 58% and 19% to factor in the higher costs.

“Our revised TP of RM1.56 (-36 sen) is still based on eight times FY20E price-to-earnings ratio,” it said.

Maybank Research said 1H19 core net profit of RM21mil (-97% YoY) reached only 5% of its full year forecast. Its FY19 forecast was the second lowest on the street and needless to say consensus will be revised down.

“AAGB’s Malaysian operation, which is the bulk of its business, has a fundamental flaw whereby it cannot raise ticket prices due to competitors’ irrational behaviour. This situation is also rampant in Thailand and India.

“However, Indonesia and the Philippines are performing well as the industry has consolidated and airlines are gaining pricing power.

“We acknowledge that the competitive environment in Malaysia is not sustainable. Capacity is more than sufficient, consumer sentiment is muted and airlines are cutting fares. Either Malaysia Airlines Bhd or Malindo Air (Not listed), or both, must retract and scale down to fundamentally improve the state and health of the industry.

“Unfortunately, we don’t see any tangible signals of this happening soon. The current competitive environment is brutal and there is no clarity when the situation will improve. We advocate selling as there is further downside risk to earnings amid the very weak fundamental outlook,” it said.


   

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