AirAsia X’s 2017 headline profit was a positive surprise to us, but in line with market expectation. The high net profit of RM98.9n (+121% yoy) in 2017 was mainly contributed by net unrealised forex gain of RM76.1m. Core net profit of RM27m was below our forecast of RM45.7m. We cut our EPS forecasts by 30% in 2019E to reflect higher operating costs and fewer additional aircraft. We reaffirm our SELL call with a lifted TP of RM0.32, based on target PER of 10x.

Headline Profit Above Our Expectation

Headline net profit of RM98.9m in 2017 was in line with consensus forecast of RM98.4m but above our estimate of RM45.7m. Revenue jumped 17% yoy in 2017, mainly driven by a 19% increase in ASK. RASK decreased by 3% yoy with some pressure on yields due to competition. US$ CASK was flat with cost control and efficiency improvement measures implemented. Average load factor improved 3ppts to 82% in 2017. US$ CASK ex-fuel increased 5% yoy mainly due to higher staff costs (salary adjustments to retain staff), maintenance and user charges and aircraft operating lease expenses. Overall operating costs increased 17% yoy in 2017, holding back EBITDA growth at 14% yoy.

Benefited From the Stronger Ringgit

The stronger Ringgit moderated the increase in cost as about 60% of its cost base is in US$ while about 40% of its revenue is in foreign currencies. The translation of its US$ loans and cash/deposits in foreign currencies to Ringgit led to net unrealised forex gain of RM76.1m. PBT jumped 127% yoy to RM186.8m due to higher operating profit and forex gain. Core net profit declined 39% yoy to RM27m as AirAsia X made provisions and write-downs to clean up its balance sheet. Better working capital management generated free cash inflow to reduce its net gearing to 0.43x in FY17 from 0.74x in FY16.

Reaffirm SELL With a Higher TP of RM0.32

We reaffirm our SELL call with a higher 12-month TP of RM0.32 (raised from RM0.26). We roll forward our EPS base year to mid-2019E and applied the same target PER of 10x. Competition remains stiff in the airline industry while the new passenger service charge (46% hike) for international passengers at klia2 effective from 1 February 2018 could dampen passenger growth. Upside risks: decline in crude oil prices, higher-than-expected RASK and ASK growth, and strengthening Ringgit.

Source: Affin Hwang Research - 21 Feb 2018