Continue Bleeding, Downgrade to SELL

AirAsia X (AAX) reported another disappointing set of results – 3Q19 core net loss of RM142m was below the street and our expectations. The poor results were due to weaker operating profit (stiff competitions and lower aircraft utilisation, partly cushioned by lower fuel cost), accounting impact from the adoption of MFRS16 and high taxation. We cut our 2019-21E EPS to reflect the challenging market conditions, as seen by AAX’s weak operational statistics. Downgrade to SELL (from HOLD) with a lower TP of RM0.10 (from RM0.16), based on 2.5x 2020E BVPS. Looking ahead, we expect AAX to report losses in 2019-21E; the weak results should put pressure on its share price.

Sequentially, operating loss has narrowed but high taxes widened losses

AAX released a weak set of results - 3Q19 core net loss has widened to RM142m (from RM124m core net loss in 2Q19) due to higher taxation of RM73m (versus tax credit of RM62m in 2Q19). Operationally, AAX’s 3Q19 operating loss has narrowed sharply to RM15m, from RM110m in 2Q19 due to lower fuel cost (-17% qoq to RM370m) and decline in user charges (-44% qoq to RM61m). The group’s revenue was relatively unchanged qoq at RM1.01bn.

9M19 Core Net Loss of RM312m, Below Expectations

Cumulatively, AAX’s 9M19 core net loss has deepened to RM312m, from RM192m core net loss in 9M18 due to lower revenue (-6.4% yoy), higher maintenance and overhaul expenses and higher taxation, partly cushioned by lower fuel cost and user charges. Overall, the results were below market and our expectations – the street was forecasting a net loss of RM182m for FY19E while we were previously expecting core net loss of RM220m. The earnings miss was due to weaker than expected revenue and high taxation.

Management attribute the poor results to lower aircraft utilisation, irrational competitions, exit tax, accounting changes and weak associate performance (AirAsia X Thailand)

While AAX has done a commendable job in controlling the operating cost, the revenue had come in below our expectations. The group carried 4.6% less passengers in 9M19 and the average base fare has slipped by 0.2% yoy. Also, AAX saw lower aircraft utilisation due to network restructuring. Broadly, we believe that stiff competition, implementation of exit tax and AAX’s aggressive expansion plan (and the needs to fill its capacity) had jointly affected AAX’s pricing power, resulted in negative ASK spread and the operating losses. Elsewhere, the adoption of MFRS16 has added another RM177m accounting losses to AAX’s 9M19 P&L.

Source: Affin Hwang Research - 14 Nov 2019