AirAsia X (AXX) reported another weak set of results – 4Q19 core net loss of RM228m was well below our and street expectations, due to higher-than-expected depreciation and finance costs, as well as higher deferred taxation. The aviation business environment remains challenging – the ongoing Covid-19 outbreak and travelling restrictions to / from several countries should weigh on AAX’s 2020 profitability. We cease coverage on AAX due to a reallocation of resources and low institutional interest. Our last recommendation was SELL with a price target of RM0.10.

Losses Widened in 2019

AAX released another weak set of results – 4Q19 core net loss widened to RM228m (from a RM142m core net loss in 3Q19) due to higher depreciation and finance costs, as well as the recognition of RM141m of deferred taxation. Cumulatively, AAX’s 2019 core net loss deepened to RM539m, from a RM290m core net loss in 2018 due to lower revenue (3.3% yoy), higher maintenance and overhaul expenses and higher taxation, although this was partly cushioned by a lower fuel cost. Overall, the results were below our and market expectations.

Challenging Business Environment

We are cautious on AAX’s 2020 business outlook. In addition to the business headwinds it faced in 2019 (stiff competition, high maintenance & overhaul expenses), the ongoing Covid-19 outbreak and the travelling restrictions to / from several countries should weight further on AAX’s 2020 profitability. China represents 30% of AAX’s capacity. Management plans to undertake several measures (eg. route suspension, potential outright sale of 2 aircrafts, renegotiation for lease reduction / lower maintenance reserves) to manage its cashflow.

Cease Coverage

We cease coverage on AAX due to a reallocation of resources and low institutional interest. Our last call on the stock was SELL with a 12-month price target of RM0.10.

Source: Affin Hwang Research - 28 Feb 2020