Can Capital A fly higher and longer?

Capital A Bhd looks like it could shift into higher gear having rebounded from its trough of 64 sen seen in April, its lowest level in over a year. The counter have since moved up to touch 90 sen in May but lost some ground to fall to a low of 71.5 sen on Aug 6.

Fundamentally, the aviation group is looking stronger having returned to the black in FY23 to post a net profit of RM336.8 million from a net loss of RM3.2 billion in the previous year. It then narrowed its quarterly net loss to RM91.6 million in 1QFY24 from RM159.6 million in 4QFY23.

Consensus is forecasting the group to remain profitable with net earnings of RM528.4 million in FY24 and RM801.3 million in FY25, implying forward PERs of 6.2x and 4.1x, respectively.

Meanwhile, Capital A is a beneficiary of the strengthening ringgit, which gained 6.5% against the USD in the past one month to RM4.38 currently. This is expected to reduce its jet fuel costs and sizeable debt level, both of which are mostly denominated in USD.

However, the worst is far from over as it has yet to come out of its Practice Note 17 (PN17) status. It has a massive debt load, which stood at RM4.78 billion as at end-March 2024. Capital A said in Aug 1 that it has made substantial progress in equity and debt-raising efforts, which is expected to be announced in due course.

The immediate key hurdle for Capital A and its medium-haul affiliate AirAsia X Bhd is to convince their shareholders of the merits of the merger between Capital A’s short-haul airlines and AAX. Thus, both airlines need to continue delivering profits to convince their shareholders that the deal is worth it. Capital A is aiming to complete the sale of its aviation assets to AAX by December.

Based on the pro forma effect of the proposed disposals, the shareholders’ fund of Capital A is expected to turn to a gain of RM10.76 billion from a negative position of RM8.8 billion as at Dec 31, 2023, bringing the airline closer to lifting itself out of PN17 status.

AirAsia has been rapidly rebuilding and expanding its network this year. AirAsia Group now has 272 routes, based on OAG data. This compares with 332 routes in July 2019.

On Aug 1, AirAsia Group took delivery of four new Airbus A321neo aircraft, bringing its total fleet to 221. As travel demand picks up, once Capital A puts its house in order, the counter may fly high again.