On track for a profitable 2016

AAX reported another profitable quarter with strong operational improvements and higher yields. RPK grew 39% yoy despite the ASK expansion, which boosted the load factor to a high of 78%. FY17 looks challenging with pressure on yields due to rising competition amid strong capacity growth, but a higher average base fare on matured routes should negate the lower load. The share price correction presents a good opportunity to accumulate. Upgrade to BUY.

3Q16 remains in the black

AAX’s 3Q revenue jumped 44% qoq to RM982m, as the long-haul low-cost carrier flew more passengers (+35%) during the quarter on higher frequencies and route deployments. The strong growth in RPK (+39% yoy) on the back of an ASK increase (+34% yoy) led to a higher load factor at 78% (+3ppts yoy). The combined volume growth was more than enough to arrest the decline in RASK (-7%), which had been partly to pass on the lower fuel costs and a reflection of the overall increase in the industry’s long-haul capacity. Nonetheless, AAX boosted the average passenger fare by 4%, as it continued its effort in pushing for higher ancillary income through expanded offerings of higher-margin products on board.

On track for first profitable year since listing

AAX reported 3Q core net profit of RM43m after excluding the forex loss of RM33.8m. This was a remarkable turnaround from the core net loss in 3Q15, traditionally a leaner quarter. The key contributor to the turnaround was the lower CASK, which fell for the 7th consecutive quarter as the lower fuel costs boosted profitability. As a result, yields surged to 0.64c/ASK in 3Q from a loss of 0.54c/ASK in the preceding year. We expect FY16 to be the first profitable year for AAX since its listing. 4Q is traditionally AAX’s strongest quarter, and judging from the guided forward booking load factor and improvement in the average base fare, AAX is on track to reporting full-year profitability.

Upgrade to BUY. TP higher at RM0.49.

We like AAX for its turnaround story and operational improvements in fleet management, leading to efficient capacity deployment on profitable routes and better pricing power, with a further ancillary income boost on cross-selling opportunities. While competition could heat up on rising capacity, we expect AAX to weather it through pricing discipline, route optimization, and a higher average base fare via the ancillary income boost. We upgrade the stock to a BUY, with a higher TP of RM0.49 based on a higher PE of 8x on 2017E EPS. Key risk: a sustained increase in jet fuel prices.

Source: Affin Hwang Research - 23 Nov 2016