AirAsia X (AAX) reported a net loss of RM207m in 2QFY19. This was mainly dragged by a one-off adjustment from sale and leaseback involving three aircraft amounting to RM72.6m and unrealized forex loss of RM85m due to weaker Ringgit against the US Dollar. After excluding these and also deferred tax of RM63m, core net loss for 2QFY19 widened to RM114m (vs -RM92.1m in 2QFY18). This brings its 1HFY19 core net loss to RM144.2m, which is below our and consensus’ expectations of a full-year net profit of RM16m and net loss of RM4m respectively. The variance is mainly due to lower-than-expected average fare realized (versus our expectations) and higher-than-expected finance costs from the MFRS16 impact. We trim our forecasts, with FY19 now seeing loss estimates of RM181m (vs net profit of RM16m) and FY20/FY21 cut by an average of -44%. Given the challenging operating environment going forward, we change our valuation method to price to book value. Consequently, our target price is lowered to RM0.14 (previously RM0.20) based on 1.4x FY20F BV (Chart 1), with call downgraded to Underperform given the downside risks.

• Revenue declined amid capacity realignment. In 2QFY19, revenue fell to RM1.01bn (-4.5% YoY) due to seasonal capacity management and termination of single-route markets e.g. Auckland, Kathmandu and Tehran which lowered its capacity in terms of average seat per km (ASK) (-6% YoY) and number of passengers carried (-7% YoY). Meanwhile, the addition of 2 aircraft YoY lowered its average aircraft utilisation to 14.3 hours YoY from 16 hours in the prior year. Despite that, average base fare increased by 4.5% YoY to RM437, with revenue per average seat km (RASK) increasing by 1.5% YoY to 12.03 sen. For 1HFY19, revenue dropped 6.4% YoY to RM2.18bn due to lower RASK by 1.4% YoY to 12.73 sen.

• Higher cost per ASK due to MFRS16 impact and one-off items. During the quarter, cost per ASK (CASK) increased 4% YoY to 13.47 sen due to the adoption of MFRS16 which led to higher financing cost. During the quarter, it also absorbed aircraft lease expenses for its Indonesian associate amounting to RM17m following its suspension of operations. Excluding one off adjustment for the disposal of the three aircraft via sale and leaseback in April 2019, CASK remained unchanged at 12.99 sen. Average fuel price declined 3.4% YoY at USD86/bbl (vs USD89/bbl in 2Q18). As a result, AAX reported net operating loss of RM186.2m in 2Q19 amid the weak travel season in 2Q.

• Outlook. In terms of fleet, Malaysia (MAAX) operation will remain with 24 aircraft for FY19, while Thailand (TAAX) will be adding up to five aircraft through operating leases (including new delivery of two aircraft A330neo by end August 2019). Average base fare is expected to continue to be under pressure due to increase in capacity in core and new routes, coupled with slowdown of tourism growth from China and Korea market segments. The implementation of departure levy from September 2019 onwards may also potentially impact the demand for air travel given 3Q being a lean quarter for travel demand. Meanwhile, we understand there are also earnings risks from no provisions having yet been made on the difference of passenger service charge (PSC) owed to Malaysia Airports (MAHB) amounting to c.RM27m.

Source: PublicInvest Research - 23 Aug 2019