We  initiate  on  AirAsia  X  (AAX)  at  MYR1.65  per  share,  premised  on  an adjusted FY14F EV/EBITDAR multiple of 8.5x.  We see the recent IPO as timely for investors to ride on the company’s next leg of growth. We foresee a robust earnings CAGR of 136% from FY12 to FY15, propelled by  rising  passenger  traffic  as  a  result  of  an  expanding  fleet,  growing yields and new ancillary initiatives. We initiate coverage on AAX with a BUY.   

- A straightforward thesis. AAX’s strengths lie in two crucial elements: i) operating  at  the  lowest  possible  unit  cost,  and  ii)  churning  up  high passenger  volume.  By  maximising  an  aircraft’s seat inventory by flying longer  hours,  this  long  haul  low  cost  carrier  (LCC)  is  able  to  generate higher  seat  loads  and,  ultimately,  high  topline  revenue.  The  higher aircraft  utilisation  not  only  maximises  revenue,  but  also  lowers  the  cost per  seat,  which  in  turn  helps  it  minimise  overall  unit  cost  as  it  handles more passengers and traffic. What AAX currently lacks, however, is the scale  to  emulate  the  success  of  sister  company,  AirAsia  (BUY,  FV: MYR3.94).  Hence,  the  recent  IPO  is  a  timely  move  in  taking  this  long haul LCC to its next stage of growth, during which it will enlarge its fleet and achieve the scale it needs to propel earnings. 

- Using  low  fares  to  stimulate  traffic.  Being  the  only  long  haul  LCC operator in Malaysia, AAX has not only been able to take market share from the full service carriers, but also successfully stimulated passenger traffic  in  the  routes  it  operates.  The  airline  has  picked  Bangkok  as  its new  hub,  in  tandem  with  its  vision  to  be  a  leading  long  haul  LCC. Together  with  other  carriers  in  the  AirAsia  Group,  it  is  working  towards building the world’s first multi-hub long haul LCC network.

- Earnings CAGR of 136%. We foresee robust earnings CAGRs of 136% from  FY12  to  FY15,  fuelled  by  rising  passenger  traffic  as  AAX  expands its  fleet,  enhances  yield  and  launches  new  ancillary  initiatives.  Moving forward,  the  company’s  rising  economies  of  scale  owing  to  fleet expansion should further pare down unit costs.   

- Buy  for  the  growth.  We  value  AAX  at  MYR1.65  per  share,  based  on 8.5x  adjusted  FY14  EV/EBITDAR.  Its  12x  FY14  implied  P/E  –  although at  a  1%  premium  to  its  LCC  peers  –  is  justifiable  given  its  low  implied PEG of 0.5x (vs peers’ 0.8x), as reflected by the LCC’s strong 3-year profit CAGR of 136%. We initiate coverage on AAX with a BUY.

Source: RHB