AirAsia X’s (AAX) 2Q18 result was below our expectation as core net profit fell into a RM23m loss. High average oil price eroded margins. Thailand AAX (TAAX) remains the bright spot, affirming AAX’s plans to channel the bulk of aircraft deliveries to TAAX going forward. We cut our earnings forecasts and reduce the TP to RM0.28 (from RM0.32) based on 1.3x P/BV. We anticipate elevated oil price to weigh on near term earnings.

Below Our Expectations

AAX’s 2Q18 core loss of RM84m dragged 1H18 core earnings into losses, -RM23m (vs 1H17: RM52m). This is below our and consensus expectations. Revenue rose 1.7% yoy despite local general elections seeing muted international travel. Passenger growth surged to RM1.56bn or 12% yoy for the quarter. This was higher than ASK growth of 6% yoy as AAX expanded its capacity to add new routes including Jeju and Jaipur and increase flight frequencies to proven routes such as Seoul and Taipei as it rationalised its Tehran route. Meanwhile, RASK fell -4% yoy in 2Q18 due to capacity being optimised for shorter routes and diluted fares in the period surrounding Malaysia’s 14th General election. AAX managed to muster ancillary revenue to grow 4% yoy.

Thailand a Bright Spot But Far Outweighed by Higher Fuel Cost

CASK ex-fuel decreased -4% yoy due to improved cost efficiency on the back of higher aircraft utilisation of 7% to 16 hours/day. Factoring in 36% higher fuel price in 1Q18 yoy, CASK increased by 3% yoy, outstripping RASK for the quarter. Operating profit subsequently fell into losses of -RM69m for the quarter (vs 2Q17: RM34m). Margin erosion is likely to persist going forward as AAX has only hedged 12% of 2018 fuel requirement at USD69/bbl. Associate TAAX saw earnings grow exponentially to USD7.8m from a breakeven position as it carried 25% more passengers against 13% higher base fare. While FY19 looks to be a bumper year for TAAX as it receives 3 A330ceo aircrafts by end 2018, it could be weighed by higher fuel cost going forward. Ultimately, stripping out the unrealised forex gain and operating losses, it more than offset headway made by AAX’s associates as group earnings fell into losses.

Reaffirm SELL With a Lower TP of RM0.28

We cut FY18-20E earnings by RM179/147/58m, factoring in revisions to our jet fuel price assumption. Maintain SELL as we reduce our TP to RM0.28 (from RM0.32), which is now based on a target P/BV of 1.3x FY19 from a target PER of 10x FY19 EPS. The peg is -1 SD below its trading mean. The change in valuation method is to reflect AAX’s inherent value despite a lull in their FY18-19E earnings. Upside risks: decline in crude oil prices and higher-than-expected RASK and ASK growth.

Source: Affin Hwang Research - 3 Sept 2018