Focus in core markets, to benefit AAX in the long run
Target price adjusted to RM0.40
1HFY18 performance turned red. AAX recorded net loss in 1HFY18 to the tune of RM16.0m. Excluding exceptional items, the core net loss of RM19.0m was below ours and consensus’ expectations at -7.14% and - 10.46% respectively. Consequently, it led to a drop of net core profits by - >100%yoy in 1HFY18. The negative variance was steered by the increase in overall opex, as a result of +24.7%yoy higher fuel expenses in 2QFY18.
Volatility in oil price, a lingering challenge. Following the increase in average fuel price, 1HFY18’s cost of fuel climbed +24.6%yoy higher. Cumulatively, the amount accounted for 39.3% of total revenue, which was +6.3ppts(yoy) higher than 1HFY17. While operational numbers have been resilient in 2QFY18 with RPK rising by +7.2%yoy, volatile fuel cost remained a major headwind to the long-haul business model. Management mentioned that further volatility will be mitigated through adjustment in air fares and further reduction in ex-fuel costs. In 2QFY18, we noted that CASK ex-fuel was down by -4.0%yoy, attributable to further operational efficiencies.
RASK-CASK spread shrunk. RASK-CASK spread in 2QFY18 dipped into negative territory as a result of AAX embarking on a load active, yield passive strategy to squeeze out its competitors and gain market share. Notably, this strategy was evident in its operating numbers. For the first half of 2018, AAX’s ASK grew +7.8% which was well absorbed with RPK rising +8.4%yoy leading to a +0.3ppt gain in load factors which averaged at 82.5%. This however, came at a cost with average fares falling - 5.4%yoy.
Long-term positive. While the drop in average fare could weigh down earnings, we believe further recovery is on horizon as core routes start to gain better traction moving forward. Consequently, we believe further improvement in market share will enable pricing power by AAX, leaving positive impact to yield spread. The effects of which are expected to bear fruit in the long-run, as it continues to take advantage of the high growth potential particularly in China, Japan and South Korea.
Despite the optimism, downward adjustments to earnings are necessary in the near term. Given that earnings came in below our estimate, we trimmed down our forecasts in FY18 and FY19, by -50.1% and -17.1% respectively. This is taking into consideration the reduction in our airfare as well as the increase of our operating expenses assumptions in the near term.
Maintain our BUY call. We expect full year earnings to stage a recovery in 2HFY18. This could be possible through further cost cutting initiatives, better capacity utilization and favourable seasonal factors in 4Q. Despite our lower assumptions of the FY18 and FY19 performance, our optimism on AAX’s prospect is tied to its long-term strategic plan of 1) further reduction in CASK following expansion plan; and 2) stronger focus in core markets. This will be supported by AAX’s gradual shift to modern fleet operation. It is poised to reap the first mover’s advantage in reducing cost and offering more competitive price given its position as the first airline in Asia to operate the A330neo. All things considered, we maintain our BUY call with an adjusted TP of RM0.40 pegging its EPS to PE of 8.5x.
AirAsia X (AAX) reported a 2QFY18 net loss of RM57.5m. Excluding forex gain and tax incentives, 2QFY18 core net loss is RM92m, resulting in a 1HFY18 core net loss of RM19m. This was below our and consensus’ estimates compared to full-year net profit forecasts. The discrepancy was mainly due to higher-than-expected maintenance and overhaul as well as aircraft fuel costs. Revenue for 1HFY18 of RM2.3bn was also below our estimates at 42% of full year forecast. We adjust our forecasts accordingly, which lowers our earnings by an average of 44%. We downgrade our call on AAX to Neutral call with a lower target price of RM0.35 (previously RM0.44) based on 8x FY19F EPS.
Revenue for 2QFY18 was flat YoY to RM1bn (+1.7% YoY) though its passengers carried jumped 13% YoY amid an increase in seat capacity by 12% YoY. This was due to lower revenue per average seat km (RASK) of 11.77 sen (-4% YoY) during the quarter on the back of lesser demand for international air travel owing to Malaysia’s General Election and reduced capacity in the Australian market. For 1HFY18, revenue jumped 4.6% YoY to RM2.3bn.
Net profit. During the quarter, cost per ASK (CASK) increased 5% YoY to 13.0 sen due to higher fuel price at USD89/bbl (vs USD65/bbl in 2Q17). As a result, AAX reported net operating loss of RM99m in 2QFY18 due to a naturally weak travel season in 2Q, higher fuel prices (+25% YoY), lower sales following the General Election in Malaysia as well as short term losses from additional frequencies and new routes.
Associates’ performance and outlook. Thailand (TAAX) reported higher net profit in 2QFY18 due to more passengers being carried (+25% YoY) coupled with higher average base fares (+13% YoY). TAAX is expected to receive three deliveries of A330ceo by end-2018. Meanwhile, the Group will temporarily wind down its Indonesian operations (IAAX) as it foresees challenging operational environment. The Group is evaluating whether to make a provision for amount owing by IAAX to MAAX in 3Q18 amounting to about RM160m (i.e. RM60m is aircraft related). Meanwhile, its aircrafts will be transferred to Thailand. AAX will be adding 5 aircraft through operating lease in the 2H18 for Malaysia and Thailand operations