Capital A, Still Approaching Cruising Altitude: Maybank Investment

Higher fares and lower lease rates have more than compensated for the weaker MYR and still high oil prices. Maybank Investment now forecasts CAPITALA’s return to profitability to be delayed by a year to 2024 only due to slower-than-expected redeployment of aircraft.

Although Maybank had cut its target price to MYR0.84 from MYR1.29, Capital A still offers >30% upside potential. And on
another note, the group had assured that there will not be another right and/or debts will not be converted into new shares.

First, the MYR has weakened past MYR4.50 against the USD. USD-denominated expenses traditionally accounted for 60-70% of expenses. Second, jet fuel prices remain relatively high. Fuel traditionally accounted for 30-50% of expenses. Third, backlogs at MRO service providers have delayed the redeployment of aircraft. Fourth, there is still no clarity as to when China, a major source of passengers, will lift its zero COVID policy and allow its citizens to travel freely again.… but Capital A is very much alive and flying

First, fares have not only remained high but climbed even higher in 2Q22. In fact, IAA’s average fare/stage length hit a new record in 2Q22. Many airlines cut supply during the COVID-19 pandemic and this translated into higher fares after demand started recovering in the current post-COVID world. Second, aircraft lease rates are meaningfully lower in the current post-COVID world. Maybank estimates that the group stands to save a whopping MYR860m per annum.

Maybank is also forecasting a wider net loss for the group from MYR2.44b to MYR2.89b, now forecasting FY23E core net loss of MYR700m versus core net profit of MYR250m previously, and trimming the FY24E net profit by MYR100m to MYR268m.

The revised FY24E net profit forecast of MYR268m is similar to the previous FY23E net profit forecast of MYR254m. Essentially, Maybank now expects Capital A’s return to profitability to be delayed by a year only due to the slower-than-expected redeployment of aircraft.

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