AirAsia X (AAX) reported a headline net profit of RM33.6bn for 3QFY22 owing to the completion of the Proposed Debt Restructuring and which saw the Group reversing the impairments and provisions that had been made in prior periods. As the financial year end of the Group has been changed from 31 Dec 2020 to 30 June 2021, we compare it with 1QCY21 (similar period last year ending Mar 31). Adjusted for non-recurring items, 3QFY22 core net loss of RM29.8m narrowed from a core net loss of RM307.5m YoY in 1QCY21 but widened from RM11.3m QoQ in 2QFY22. While results are below our expectation, we see stronger prospects moving forward as many of the Group’s key markets have reopened their international borders by removing or relaxing travel restrictions. We like the turnaround story of the Group, though full value is likely only to be attained with shareholders going through the Group’s entire corporate exercise (including rights issue). We affirm our Outperform call on AAX though trim our EV/EBITDA-derived target price to RM1.04 (RM1.30 previously) as we adjust our estimates to reflect higher fuel price and maintenance costs.

• 3QFY22 revenue doubled YoY to RM111.0m mainly due to higher revenue from freight services and charter flights, with minimal contribution from scheduled flights as international border restrictions remained in force during the quarter. However, revenue fell 5.3% QoQ as cargo operations were adversely impacted by the recent lockdowns imposed in China and a decline in cargo yields as more capacity comes bank online. AAX continues to seek to diversify its cargo customer base to support cargo revenue growth moving forward.

• 3QFY22 core net losses narrow YoY but widen QoQ. AAX had, on 16 March 2022, lodged the Sanction Order for its debt restructuring. As a result of the lodgement, all liabilities of AAX forgiven under the scheme would be credited back to the income statement, effectively reversing the impairments and provisions that had been made in prior periods. Excluding the Proposed Debt Restructuring, AAX’s core net losses narrowed to RM30.9m YoY compared to core net losses of RM307.5m in 1QCY21, though widening QoQ from core net losses of RM11.3m in the previous quarter on lower revenue and higher fuel and maintenance costs.

• Fund Raising. AAX had, on 21 Feb 2022, announced that it has fixed the issue price for its 1-for-1 rights issue at RM0.28 per share, which will raise up to RM116m with a similarly priced special issue to raise RM50m from the Proposed Share Subscription by a special purpose vehicle (SPV). In addition, the SPV will also be given an option to subscribe to an additional 15% of the enlarged total number of AAX shares after the Proposed Rights Issue and Proposed Share Subscription. All approvals for the fundraising exercises have been obtained. The fund raising exercise is expected to be completed by 2HCY22.

• Outlook clouded by high oil prices however. AAX operated a total of six aircrafts during the quarter and intends to have full fleet operational (13 aircrafts) by end of 2022. Cargo and scheduled flight revenue is expected to continue to grow as more aircraft are progressively brought back into service, along with more countries removing travel restrictions. While air travel recovery trends are expected to continue into 2022, high oil prices are a material near-term risk for AAX as it has no fuel hedging contracts. AAX may pass on the surging fuel bill to passengers and air cargo via fuel surcharges and higher tickets prices, though demand may be dented by the higher fares. AAX’s margin and cash flow are also likely to be weaker as a result.

Source: PublicInvest Research - 31 May 2022