AAX recorded its first net profit since its IPO, reporting a net profit of RM230.5m for FY16 (FY15: -RM349.6m). Its FY16 core net profit of RM251.1m was above our and consensus’ estimates, accounting for 122.9% and 133.7% respectively, with the discrepancies mainly due to lower-than-expected finance costs. Its FY16 operating profit of RM276.0m was in-line with our estimates however. We believe the positive performance will flow through into FY17 and onwards as a result of better cost efficiencies and improvement in its aircraft utilisation. Nevertheless, we still remain cautious on the impact of a stronger USD on its operating cost (i.e. aircraft maintenance and fuel costs), though fuel price volatility is expected to be muted as AAX has already hedged 74% of its fuel cost at USD60/bbl (vs current fuel price at USD65/bbl). We maintain our Neutral call on AAX with unchanged target price of RM0.415 based on 1.6x FY17F P/BV.

• Revenue in 4Q16 surge by 39.1% YoY to RM1.17bn, bringing its FY16 to RM4.0bn (+30.8% YoY), mainly due to a 50.5% YoY jump in its scheduled flights revenue to RM2.5bn as a result of increased in passenger volume (+29.7% YoY) and available seat km (ASK) (+25.5% YoY). Average passenger fare and ancillary revenue in FY16 grew by 16.5% and 3.9% respectively, though seeing a slight drop in 4QFY16 by 3.7% and 2.8% respectively due to increased flight frequencies and promotional fares on new routes. By region, FY16 revenue growth is mainly driven by strong demand from the North Asian and Australian segments which jumped by 38.2% YoY and 47.2% YoY respectively.

• EBITDAR and pre-tax profit. AAX reported an EBITDAR of RM1.2bn in FY16 (FY15: RM813.4m) mainly due to a 94.4% YoY increase in its North Asian segment. This is on the back of lower cost per ASK (CASK) to 13.0 sen (-5.8% YoY) due to lower average fuel cost at USD61/bbl vs USD76/bbl in FY15. However, its operating expenses in FY16 surged by 17.7% YoY due to increase in maintenance, overhaul and user charges expenses (+22.2% YoY) and aircraft operating lease expenses (+19.8% YoY). This is in consequence to an increase in fleet size and stronger USD against the Ringgit. In addition, its other operating expenses also jumped by 82.9% YoY to RM251.3m, partially due to fixed assets written-off amounting to RM27.5m and receivables impairment of RM11.7m while a forex gain of RM78m was recognised in FY15. Staff costs are expected to increase going forward as AAX has recently revised its pilots’ salary scheme effective November last year, which incidentally escalated its staff cost by 33.0% QoQ in 4Q16. Overall, AAX recorded a pre-tax profit of RM251.2m in FY16, mainly due to North Asian segment which reported a pre-tax profit of RM251.2m, while its Australian segment’s pre-tax loss narrowed to RM16.3m.

• Associates’ performance. Thailand (TAAX) saw short-term impacts from a weakened tourism sector in 4Q16 as the nation mourned the passing of King Bhumibol Adulyadej while the Government also initiated a crackdown on zero-dollar tours for Chinese tourists. Meanwhile, Indonesia’s (IAAX) services have been temporarily suspended since September 2016 as part of its aim to improve operational efficiencies. During the quarter, the 2 aircraft in IAAX were wet-leased to Malaysia AirAsia (MAA), which helped to partially pay the rental lease to the Group. We understand that IAAX has already submitted plans to resume its operation, probably by early 2H2017.

• Outlook for 2017. As there will be no aircraft deliveries in 2017, AAX targets to improve its aircraft utilisation by using free day time aircraft windows for incremental flight frequencies and potential new routes. AAX plans to strengthen its key markets (i.e. China and Australia). It is expected to launch its Honolulu route in June 2017 (KL-Osaka-Honolulu).

Source: PublicInvest Research - 23 Feb 2017