CIMB Research retains Reduce for AirAsia X

Date: 25/08/2017

Source  :  CIMB
Stock  :  AAX       Price Target  :  0.25      |      Price Call  :  SELL
        Last Price  :  0.29      |      Upside/Downside  :  -0.04 (13.79%)

KUALA LUMPUR: CIMB Equities Research is maintaining its Reduce call for Air Asia X (AAX) with an unchanged target price of 25 sen, still based on one time CY17F price-to-book value (P/BV). 

It said on Friday AAX’s 1H17 group core net loss of RM22.5mil was broadly in line with its full-year net profit forecast of RM43mil as it expects the second half to be seasonally stronger. 

“Having said that, the risks to our forecasts are skewed to the downside, as demand and yield pressures on AAX’s Chinese routes are accompanied by rising costs,” it said.

To recap, AAX posted 2Q17 core net loss of RM47mil, much higher than the RM9.6mil loss in 2Q16.

Revenue rose on 26% available seat kilometre (ASK) capacity expansion, and 5.1 percentage points rise in passenger load factor to 80.4% resulted in an impressive 35% on-year rise in revenue passenger kilometre (RPK) demand. 

“However, AAX will price at whatever level it takes to keep load factors elevated (load active, yield passive strategy), and the health of the business is best judged by yields. Unfortunately, 2Q17 yields fell 10% on-year,” it pointed out.

CIMB Research said this reflected rising competition for sixth-freedom traffic originating from China. Scoot (now also incorporating Tigerair) has increased its weekly seat capacity from Singapore to China by 12.9% on-year, between mid-2016 and mid-2017, offering Chinese travellers an alternative to hubbing in KL. 

Meanwhile, direct services between China and Australia have increased 38% on-year in that same time period, due to aggressive expansion by the Chinese airlines; both countries signed an open skies agreement in late-2016. 

“Chinese travellers are also making fewer trips to Malaysia and Singapore as a result of the Chinese government’s curbs on outflow of capital for the purposes of purchasing property. 

“One prominent casualty of this new policy has been Country Garden’s Forest City project on the southern tip of Johor, which has seen sales to Chinese purchasers dry up, according to this South Chiuna Morning Post article,” it  said. 

Data on inbound Chinese visitors into Malaysia and Singapore appear to confirm these anecdotes.  

In addition to the yield pressure on its Chinese routes, AAX also had to contend with rising costs, primarily due to the 11% on-year rise in the price of jet fuel. 

The 8% appreciation of the US$ against the RM also impacted US$-denominated costs like fuel, leasing, maintenance, and overflying charges. 

CIMB Research said meanwhile, crew wages were increased earlier this year due to the shortage of pilots globally, which then caused wage inflation. Ancillary income yields rose 4.7% on-year in 2Q17, helping to offset some of the cost pressures. 

As a result of the above, Malaysia AAX suffered a core airline net loss of RM48mil in 2Q17, vs. a core net profit of RM16m in 2Q16, excluding estimated profits from its aircraft leases to its associates. 

“This is MAAX’s first quarterly core loss after five consecutive quarterly profits,” said the research house. 

Thailand AAX saw its earnings before interest (EBIT) improve from a RM17mil loss in 2Q16 to a small RM1.3mil profit in 2Q17, while India’s AAX’s EBIT narrowed from RM38mil to RM18mil, but these improvements were more than offset by the deterioration in Malaysia AAX’s fortunes. 

“We expect AAX’s 3Q17 to be impacted by possible start-up losses on the new 4x weekly Osaka-Honolulu route which commenced on June 28. 

“Competition with MAS and Malindo may heighten from 4Q17F onwards as both airlines are planning to take more A330 deliveries and compete with AAX on medium-haul routes to North Asia. The key upside risks would be possible ringgit appreciation and fall in oil prices,” said CIMB Research.

Read more at http://www.thestar.com.my/business/business-news/2017/08/25/cimb-research-retains-reduce-for-airasia-x/ 


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