AirAsia X (AAX) reported a disappointing 1Q19 core net loss of RM46m (vs RM60m core net profit in 1Q18) due to lower revenue, higher maintenance & overhaul costs and adoption of MFRS16 (Lease). We cut our 2019-21E EPS forecasts to reflect the challenging market conditions. Maintain SELL with a lower TP of RM0.17. AAX’s business outlook remains challenging - we expect higher losses in 2Q-3Q19 due to seasonality, higher oil price, weaker Ringgit and subdued passenger growth. The weak results should put pressure on AAX’s share price.

1Q19 Core Net Loss of RM46m, Below Expectations

AAX reported a weak set of results – a lower 1Q19 revenue of RM1.17bn (-8% yoy), higher maintenance and overhaul expenses, and the adoption of MFRS 16 (Lease) have resulted in a core net loss of RM45.7m in 1Q19 (from core net profit of RM60.4m in 1Q18). Headline net profit has however higher at RM43.3m (+4.4% yoy) due to RM89m forex gain arising from the strengthening of RM against US$ in 1Q19. Overall, the results are below market and our expectations – the street was expecting RM60m reported net profit for 2019E while we were projecting RM13m in core net losses. Key variation against our forecasts were lower than expected revenue and impact from adoption of MFRS 16.

Revenue fell by 8% on fewer passengers carried, lower average base fare

AAX’s 1Q19 revenue came in 8% lower yoy due to: (i) fewer passengers carried (-5% yoy) in line with a 5% drop in ASK capacity (Fig 3). AAX’s aircraft utilisation was lower at 14.6 hours / day (from over 16 hours / day) due to the ongoing capacity realignment; and (ii) lower average base fare (-3% yoy) as a result of slightly lower average sector length.

Meanwhile, Cost Was Well Managed

AAX maintained its 1Q19 load factor at 84% (unchanged yoy) and the operating costs (pre-adoption of MFRS16) was well managed at RM1.15bn (-3% yoy). The group recorded higher maintenance and overhaul expenses of RM178.2m in 1Q19 (+22% yoy) due to higher maintenance activities, mitigated by lower fuel cost (-13% yoy to RM412m) and lower user charges (-14% yoy to RM132m).

TAAX Was Profitable, But Not Reflected in AAX’s 1Q19 P&L

AAX’s 49%-owned AAX Thailand (TAAX) reported US$12m net profit in 1Q19 (-45% yoy). Despite a higher revenue (+23% yoy), TAAX reported lower 1Q19 profit due to lower load factor (90% in 1Q19 vs 94% in 1Q18) and lower average base fee (-10% yoy). Nonetheless, TAAX’s 1Q19 net profit was not reflected in AAX’s P&L due to the cumulative share of losses from the prior quarters.

Source: Affin Hwang Research - 17 May 2019