AirAsia X’s (AAX) 1Q18 result was above our expectation but below market expectations. Net profit more than doubled yoy to RM42m in 1Q18, driven by capacity expansion while load factor remained healthy at 84%. We maintain our earnings forecasts and expect weaker performance in subsequent quarters due to cost pressure from higher fuel prices. Maintain our SELL call with a TP of RM0.32, based on target PER of 10x.

Above Our Expectations

AAX’s 1Q18 net profit of RM41m (+107% yoy) comprises 38% of our fullyear forecast of RM109m but only 22% of consensus estimate of RM184m. Revenue grew 7% yoy to a high of RM1.27bn, driven by passengers carried growth of 13% yoy. This was higher than ASK growth of 10% yoy as AAX expanded its capacity to add new routes to India and increase flight frequencies to North Asia. However RASK declined 2% yoy in 1Q18 due to promotions offered to maintain a healthy load factor of 84%.

Improved Cost Efficiency

CASK decreased 2% yoy due to improved cost efficiency on the back of higher aircraft utilisation. This was despite higher fuel price in 1Q18. CASK ex-fuel cost was reduced by 10% yoy. Operating profit increased 42% yoy to RM58m in 1Q18. Its associate AirAsia X Thailand saw the strongest performance since inception, which contributed to share of associates of RM16m in 1Q18. However, unrealised forex and exceptional losses of RM19m offset the associate profits. PBT jumped 73% yoy to RM55m in 1Q18 from a low base. We believe AAX could incur losses in 2Q18 as it is a seasonally weak quarter for ticket sales, while cost pressure will increase with higher fuel prices.

Reaffirm SELL With a TP of RM0.32

We reaffirm our SELL call with an unchanged 12-month TP of RM0.32. Competition remains stiff in the airline industry. The new passenger service charge (46% hike) for international passengers at Klia2 was not implemented on 1 February 2018 but could be applied later this year, which could dampen passenger growth. Upside risks: decline in crude oil prices, higher-thanexpected RASK and ASK growth, and strengthening Ringgit.

Source: Affin Hwang Research - 23 May 2018