AirAsia X (AAX) reported a larger core net loss of RM290m in 2018 (vs RM3m core net loss in 2017) due to higher fuel costs and provision of RM162m doubtful debt for AAX Indonesia, partly cushioned by lower maintenance & overhaul costs, lower user charges and reduced marketing expenses. Overall, the results are below market and our expectations. Moving into 2019, we expect AAX’s business environment to remain challenging in anticipation of higher oil price and subdue passenger growth. AAX’s share price has outperformed KLCI by 8.4% in the last 3 months, driven by weakness in Brent crude prices and strengthening of RM against US$. At RM0.29 (2.1x 2019E book value), valuation looks rich. Maintain SELL.

Larger 2018 Core Net Loss of RM290m, Below Expectations

AAX reported a weak set of results in 2018, headline earnings plunged from a profit of RM98.9m in 2017 to a net loss of RM312.7m while core net loss has widened substantially. Key highlights: (i) load factor slipped by 1 bps to 81%; (ii) 2018 revenue was flat at RM4.5bn as an increase in passenger carried (+6% yoy) was offset by lower RASK (-5% yoy to 3.05 US Cents); (iii) higher average fuel price (+31% yoy) has affected earnings; and (iv) the group has made a provision of doubtful debt amounting to RM161.7m for AAX Indonesia. Overall, the results are below market and our expectations – the street was expecting RM49m reported net loss while we were expecting RM257m of core net losses.

Fuel Cost Aside, Other Operating Costs Are Well Managed

Fuel cost aside, management has done a commendable job in keeping its staff costs (+0.4% yoy) and user charges (-0.1% yoy) in check. AAX’s maintenance and overhaul expenses has dipped 26% yoy to RM485m, partly due to credits from the manufacturers. The credits from manufacturers are, however, largely non-recurring. Elsewhere, AAX has also lowered its marketing expenses to preserve its capital.

Sequentially, 4Q18 EBITDA came in higher but high deferred taxes dragged bottomline

AAX’s 4Q18 EBITDA of RM58.1m was a strong turnaround from RM153.8m losses in 3Q18 due to higher revenue, lower maintenance and overhaul charges and absence of material provision for doubtful debts (RM161.7m in 3Q18). Nonetheless, a higher effective tax of RM115m resulted in a disappointing quarterly core net loss of RM97.9m.

Both TAAX and IAAX Reported Losses in 4Q18

AAX Thailand (TAAX) posted losses of US$7m in 4Q18 due to higher operating cost on the back of higher fuel price while AAX Indonesia (IAAX) racked up similar losses of US$7.1m, also on higher oil prices. Operationally, TAAX saw a 19% yoy increase in passenger carried in 4Q18 on capacity expansion while IAAX’s saw a 64% yoy decline in passenger carried due to a reduction in operational routes.

Timely Fuel Hedging Should Help Mitigating Rising Fuel Prices

As at end-December 2018, AAX has hedged c.52% of its 2019 fuel requirements at an average hedge cost of approximately US$63-64/bbl (Brent price). The hedging was, in our view, timely. We expect Brent crude to strengthen to US$70-75/bbl in 2019 and AAX’s oil hedges should help lower its fuel cost in a rising oil price environment.

Raising 2019-20E EPS and TP, but maintain SELL on rich valuation and challenging business outlook

We have revised our earnings forecasts to account for: (i) AAX’s latest hedging position which should lower its fuel cost against our earlier forecast; and (ii) lower marketing charges. We now expect AAX to report a smaller net loss of RM13m in 2019E (from an earlier projection of RM76m net loss). We revise our 12-month price target to RM0.19 based on 1.4x 2019E book value (-1 SD), from 1.0x (-2SD). Maintain SELL. We expect AAX’s business environment to remain challenging in anticipation of higher oil prices and subdued passenger growth. AAX’s share price has outperformed the KLCI by 8.4% over the last 3 months, driven by weakness in Brent crude prices and strengthening of RM against US$. At 2.1x 2019E book value, valuation looks rich. Key risks to our negative view: (i) sharp decline in oil price; (ii) strengthening of RM against US$; (iii) higher than expected operational performance.

Source: Affin Hwang Research - 22 Feb 2019