Despite a 15% increase in revenue, AirAsia X recorded a net loss of RM43.3m. The company’s operating loss is mainly due to the weak RM against the USD, higher operating expenses and provision for doubtful debts amounting to RM50.2m in 3Q17. 9M17 net profit of RM14.5m made up 14.5% of our ingoing 2017E and 9.5% of consensus estimates. Hence, we cut our earnings by 15- 54% over 2017E-19E. Reaffirm SELL with a slightly lower TP of RM0.26.

Results Below Expectations

The company’s revenue in 3Q17 increased by 14.5% yoy, on the back of i) higher passenger growth of 23% yoy, ii) an increase in load factor by 1ppts, and iii) higher ASK growth of 18% yoy. In terms of segmental breakdown, scheduled flight revenue increased by 22% yoy, ancillary revenue rose by 29% yoy and freight services were up by 43% yoy. However, bottom-line fell significantly due to declining average passenger fares (-1% yoy), higher operating expenses (+25% yoy) and lower RASK (-3% yoy) as capacity increased. This note marks a transfer of analyst coverage.

Weak Ringgit and High Operating Expenses Dragged Down Profitability

On a sequential basis, AirAsia X recorded a 8.5% qoq rise in revenue but bottomline fell significantly by 191.3% qoq. The weak RM vis-à-vis the USD remains a key concern as a large portion of the company’s borrowings and operating expenses are denominated in USD. Overall operating expenses increased by 25% yoy, mainly attributed to higher staff costs, aircraft-fuel expenses, maintenance and overhaul expenses, user charges and other operating expenses. The Group is planning to increase flights in key markets such as Xi’an, Sapporo, Seoul and Busan in 4Q17; however, management expects downward pressure on average fares for certain routes as the airlines increase capacity.

Reaffirm SELL With a Lower TP of RM0.26

Earnings came in below our and consensus estimates for 2017E mainly due to a lower RASK. Thus, we cut our 2017-19E earnings by 15-54%. We reaffirm our SELL call with a lower 12-month TP of RM0.26 (from RM0.27), now based on a target PER of 10x (raised from 8x previously on expectations of a strong earnings recovery over the next 2 years) applied to our lower 2018E EPS. Upside risks: decline in crude oil prices and a strengthening in the Ringgit.

Source: Affin Hwang Research - 24 Nov 2017