AirAsia X (AAX) reported a weak set of results - 3Q18 net loss widened to RM198m (largest net loss since 3Q15) due to higher fuel cost, substantial provisions for doubtful debts and losses from its associate, Thailand AAX. The results were below consensus and our expectations. We cut our earnings forecasts and reduce our TP to RM0.17 (from RM0.28) based on 1.0x P/BV. Maintain SELL – we expect high fuel costs and a competitive business environment to erode AAX’s FY19E profit margins.

AAX Faces Myriad of Headwinds in 3Q18

AAX was hit by a myriad of headwinds in 3Q18: (i) higher average fuel price of US$91/bbl (from US$65/bbl in 3Q17) erode profit margins; (ii) Indonesian operations were affected by earthquake / volcano eruption while Thailand AAX reported losses due to seasonally lower passengers carried and higher fuel costs; and (iii) AAX recognised RM138m provisions for doubtful debts for AirAsia X Indonesia.

3Q18 revenue slipped by 4% yoy due to lower ASK, fuel price hit profit

Operationally, AAX’s ASK (available seat kilometres) fell by 4% yoy to 8,806m due to lower average sector length (-34% yoy to 3,207km) as the group re-strategized its routes, focusing on medium-haul flights while reducing frequency to the Kansai, Beijing and the Australian cities. Meanwhile, its cost per ASK rose by 12% yoy to 14.62 sen due to higher fuel price (cost per ASK ex-fuel was relatively unchanged at 9.21 sen). All in, the steeper loss before interest & tax, forex losses and losses from associates resulted in a RM197.5m net loss for 3Q18, AAX’s largest net loss since 3Q15. The results were grossly below market and our expectations.

Sequentially, Operating Losses (excluding Provisions) Has Narrowed

Excluding the RM138m provisions for doubtful debts, AAX’s 3Q18 adjusted loss before interest & tax of RM64.3m was an improvement from the LBIT of RM95.9m in 2Q18. The sequential improvement was due to lower staff costs (-16% qoq to RM90.7m) and lower maintenance / overhaul (-31% qoq to RM114.3m) which more than offset an increase in fuel expenses (+8% qoq to RM476.4m). Separately, AAX has reported substantial investment cash outflow of RM148.6m in 3Q18, largely attributable to higher inspections / MRO works for some of its engines.

Cutting EPS

We have cut our FY18/19/20E EPS forecasts to -6.7/-1.8/0.3 sen respectively, from -1.7/0.1/2.0 sen, after incorporating: (i) the weak 9M18A results; (ii) lower ASK assumptions, imputing lower average sector length as AAX reduced frequencies to the Australian cities and Kansai; (iii) higher fuel oil assumptions (our 2018-19E Brent crude price forecasts are between US$70-75/bbl) and (iv) higher RASK (revenue per ASK) in anticipation of upward fee adjustment to mitigate the impact of higher fuel costs.

Maintain SELL With Lower TP of RM0.17

We maintain our SELL rating on AAX with a lower 12-month price target of RM0.17, based on 1.0x P/BV (from 1.3x PBV). In view of the high fuel prices (we expect Brent price to recover from the current low and sustain at US$70- 75/bbl in FY19E) and competitive business environment, we expect AAX to report net losses in the immediate quarters, thereby weighing on share price. Key risks to our negative view are sharp decline in crude oil prices, higher than expected RASK / load factor. This note marks a transfer of coverage.

Source: Affin Hwang Research - 22 Nov 2018