AirAsia X (AAX) reported a disappointing net loss of RM207m in 2Q19 due to operational loss, RM83m forex losses and the recognition of RM73m oneoff adjustment from sale and leaseback transactions. While we expect AAX’s business prospects to improve in 2H19 due to seasonal factors, the market condition remains challenging and AAX may miss our earlier earnings projection. We cut our 2019-21E EPS forecasts to reflect the soft market conditions, as reflected in AAX’s subdued passenger growth. All in, we expect AAX to report losses in 2019-20E; the weak results should put pressure on AAX’s share price. Maintain SELL with a lower TP of RM0.14, based on 1.4x 2019E book value.

Another Quarterly Loss, Results Were Below Expectations

AAX released a weak set of results. Adjusted for RM83.1m of forex losses, AAX’s 2Q19 core net loss of RM124m was due to the recognition of RM73m one-off adjustment (from sale and leaseback transactions involving three aircrafts) and high operating losses during the seasonally weaker quarter. Cumulative 6M19 core net loss of RM169.7m (from RM23.2m core net loss in 6M18) was below the street and our expectations. The market is expecting RM4m net loss for 2019E, while we were projecting RM129m in core net losses. Key variation against our forecasts was the recognition of the one-off adjustment from sale and leaseback transactions and lower-than-expected revenue.

Adjusted for MFRS16 and one-offs, 2Q19 operating loss has narrowed yoy

AAX’s 2Q19 revenue fell by 4.5% yoy to RM1.01bn due to fewer passengers carried (-6% yoy), tracking a 6% drop in ASK capacity (Fig 3). The lower ASK was due to with management’s capacity realignment exercise. Meanwhile, the group’s underlying operating costs (pre-adoption of MFRS16, excluding one-off adjustments) declined by 5.6% yoy to RM1.09bn in 2Q19, resulting in a lower underlying operating loss of RM79m (pre-MFRS16), compared to RM96m operating loss in 2Q18. Notable cost reductions (yoy) were maintenance & overhaul expenses and user charges.

TAAX Reported Net Losses Due to Low Load Factor

AAX’s 49%-owned AAX Thailand (TAAX) reported US$8.8m net loss in 2Q19 (compared to US$7.8m net profit in 2Q18) due to lower load factor. TAAX has expanded its capacity, resulting in a 12% (yoy) increase in passengers carried. However, a lower load factor (76% in 2Q19, versus 91% in 2Q18) led to net losses incurred. The weak performance mirrored the low 2Q19 tourist arrival growth in Thailand. Nonetheless, management expects the load factor to pick up in 2H19.

Source: Affin Hwang Research - 23 Aug 2019