Fuel Drag

We downgrade AAX to HOLD, after strong share-price performance of 49% ytd. Despite passenger growth coming in ahead of ASK increases, AAX’s 1Q17 core net profit fell 50% yoy, driven by higher fuel expenses and staff costs, on top of a 4% decline in average passenger fare. Overall 1Q17 was weak on higher costs, but we maintain our earnings estimates in anticipation of firmer quarters with healthy forward booking numbers. Lower to HOLD from Buy, with unchanged 12M TP of RM0.57.

Competition Heating Up

AAX’s 1Q17 revenue rose 22% yoy to RM1,180.7m, on a 33% increase in passengers carried. AAX’s capacity rose 29% with a single aircraft addition and higher sectors flown, bringing the quarterly load factor to 84%. The decline of 6% yoy in revenue per available seat kilometres (RASK) did not come as a surprise due to higher capacity expansion (ASK +29% yoy), but the decline in the average passenger fare of 4% does point towards intensifying competition within the long-haul space.

Hit by Fuel Expenses

AAX booked core net profit of RM29.2m in 1Q17, representing a 49% yoy decline. We have stripped out RM19m in exceptional items from our core earnings calculation due to forex and losses recognised arising from the fuel hedges. AAX’s CASK fell 1% yoy, as operational costs were affected by higher fuel expenses (+55% yoy), as well as higher staff expenses (+40% yoy). On a positive note, AAX managed to trim 9% off the CASK ex-fuel, as it increased operational efficiencies from higher aircraft utilisation.

Core Net Profit Surprises on the Downside

While we had anticipated lower headline net profit due to the absence of forex gains reported in 1Q16, core net profit surprised on the downside with the higher operational expenses. 1Q17 was also affected by higher-than-expected tax expenses incurred. Nonetheless, we maintain our earnings estimates, as we look for subsequent quarters to pick up on healthy forward booking.

Downgrading to HOLD With Unchanged TP

Considering the significant recent run-up in the share price, market could react negatively in view of the earnings miss. We think AAX remains a solid turnaround story, but earnings volatility may dampen sentiment in the near term. We downgrade our rating to HOLD from Buy as upside looks limited. Our 12M TP is unchanged at RM0.57, pegged to 8x our CY17E EPS. We prefer AirAsia (AIRA MK, RM3.25, Buy) for exposure. Downside risks: aggressive fare cuts by the competition, lower passenger travel demand. Upside risk: decline in crude oil prices, Ringgit strenghtening.

Source: Affin Hwang Research - 24 May 2017