AirAsia X’s 1H17 core net profit decreased by 32.3% yoy to RM52.4m, constituting 52.9% of our full year forecast and 25.9% of consensus estimates. Overall, the Group’s revenue and net profit increased by 17.3% and 11% yoy respectively in 2Q17, underpinned by an increase in passenger growth, load factor and ASK. However, passenger yields fell by 3.8ppts yoy on the back of heightened competition and higher operating expenses as most of the costs are denominated in US$. Maintain SELL with an unchanged TP of RM0.27 based on 8x 2018E EPS.

2Q17 Revenue Up 17.3% Yoy, Core Net Profit Up 11% Yoy

The Group’s revenue in 2Q17 increased by 17.3% yoy, on the back of i) higher passenger growth of 34.4% yoy, ii) increased in load factor by 5ppts and iii) higher ASK growth of +26% yoy. Average base fare fell by 13.5% yoy to RM455 due to the airlines’ effort in increasing its capacity on core existing routes in order to grow market share and therefore pressuring yields. The decline of 7.3% yoy in revenue per available seat kilometres (RASK) did not come as a surprise due to higher capacity expansion. Operating expenses also increased (+22.9% yoy) on the back of higher staff cost, aircraft fuel expenses and user charges.

Excluding EI, 2Q17 Core Net Profit Fell 20.3% Qoq

On a sequential basis, 2Q17 revenue fell by 12.2%, whilst net profit increased by >100%. Net profit surprises on the upside due to foreign exchange gains. Stripping off exceptional items, core net profit fell by 20.3% qoq. Typically, Q2 is weaker compared to Q1 due to higher passenger movement during CNY festive season. Although we expect passenger growth to be stronger during Q4, management has guided that forecast for average base fares are falling on the back of heightened competition and increasing capacity. There will not be any additional aircraft for 2H17; hence, any additional growth in terms of ASK will be from higher utilization rate of aircrafts, potentially stretching current utilization rates of 16.5hours/day to 17.4hours/day.

Maintain SELL With An Unchanged TP of RM0.27

Core earnings are in line with our 2017E full year forecast; thus, we make no changes to our earnings estimates. We maintain our SELL call with an unchanged 12-month TP of RM0.27, pegging the same target PER of 8x to 2018E EPS. Upside risks: decline in crude oil prices, Ringgit strengthening.

Source: Affin Hwang Research - 25 Aug 2017