MIDF Amanah Investment Bank Bhd (MIDF Research) has downgraded Capital A Bhd to a NEUTRAL rating, with a revised target price of 99 sen, reflecting a 9.2% downside from its current price of RM1.09. This follows an unexpected loss posted in 3QFY24, which significantly missed MIDF Research's expectations, leading to a downward revision of earnings projections by up to 214%. Previously rated as a BUY, Capital A's prospects have been adjusted downwards due to increased operating expenses (opex) and underperformance from its non-aviation segments, particularly its subsidiaries, Teleport, ADE and BigPay.

The airline's results were significantly impacted by a quarterly loss of RM545.7 million in 3QFY24, pushing cumulative losses for the first nine months of the fiscal year to RM324.7 million. Despite a 90.3% year-on-year increase in EBIT, driven by improved seat load factors and a recovery in capacity, the overall performance was still disappointing. Capital A's fleet utilisation reached 77%, which helped the airlines achieve an 81% recovery in seat capacity. However, despite increased capacity and improved revenue per available seat kilometre (RASK), the company's profitability was dragged down by higher costs, especially in its non-aviation segments.

While Capital A's aviation business saw a rebound, with an 8.2% year-on-year increase in capacity, segmental performance was not as strong. The airline's improved yields and declining cost per available seat kilometre (CASK), aided by lower jet fuel prices, were overshadowed by the higher costs incurred in its non-aviation businesses, particularly ADE, which saw a hit to profitability from increased staff costs linked to its expansion.

Looking ahead, Capital A is projecting a recovery in 4QFY24, with expectations of passenger traffic reaching 88% of pre-pandemic levels, supported by an 84% capacity restoration. The group is also preparing to launch 18 new domestic and international routes, with a particular focus on India and China, where it holds a strong market share. The airline plans to expand its fleet with five new aircraft, which should bring the total number of operational aircraft to 195 by the end of FY24.

Despite the optimism surrounding its 4QFY24 outlook, MIDF Research has revised Capital A's earnings for FY24-FY26, in line with higher operating costs and more conservative assumptions regarding seat capacity recovery and load factors.