AAX is a long-haul low-cost carrier affiliated to AIRASIA and we strongly believe it is worth revisiting, banking on its turnaround story after a turbulent ride since its IPO. We value AAX at RM0.49 based on 8.0x FY17E PER with a Trading Buy call with our Core Net Profit (CNP) projections of RM223.8-275.9m for FY16-17E, AAX is currently traded at only 6.3x FY17E PER as compared to other low-cost carriers that are traded at an average of 9.3x, coupled with a decent turnaround story.

An unprofitable past... Since its listing back in July 2013, AAX registered losses for the longest time until FY15 due to several reasons; (i) overexpansion, (ii) over-capacity in the market, (iii) aggressive price war from MAS, especially on Australian route, (iv) high fuel cost environment, and (v) MH370 incident in March 2014, which negatively impacted on the China route.

... but a profitable future. However, as they moved into FY16, they managed to rake in a CNP of RM107.3m in 1H16, premised on several factors; (i) yield improvements (+5%, YoY) as a result of rationalisation of the market competition, (ii) improved load factor of 79% (+8ppt, YoY) on the back of higher capacity (+12%, YoY) due to well managed capacity and routes optimisation, (iii) the return of Chinese tourist, and (iv) low fuel cost environment (average fuel cost down by 26% to USD58/bbl). Going forward, we believe that AAX will be able to replicate its 1H16 performance as they move into 2H16 and also FY17 premised on the factors above.

Projecting a weak 3Q16 but strong 4Q16 performance. Traditionally, 2Q & 3Q are seasonally weaker quarters as opposed to 1Q and 4Q. This is because these two quarters command higher yields and ancillary revenue per pax coupled with higher load factors. As such, we are projecting CNP of RM13.4m for 3Q16 in view of a weaker season, while RM105.3m for 4Q16 that is backed by higher yields and load factors as a result of holiday season. This would effectively bring our full-year projection for FY16 to RM223.8m which we believe is highly achievable given that AAX achieved higher forward bookings in 2H16 by 3-5% as compared to 2H16 previously.

Flying into a better year. As for FY17, we foresee AAX to register better performance ahead underpinned by such low-fuel cost environment. That said, as there is no further capacity expansion for FY17 as most of the aircraft deliveries will resume from FY18 onwards, management is determined and focused in further enhancing its overall yields and load factors by: (i) increasing frequency to the North Asia route, (ii) further improvements in ancillary income through the introduction of premium lounge, making Tune Insurance and in-flight entertainment available in all markets. To recap, its ancillary income per pax in 1H16 had seen further improvements by 5% to RM140.2/pax as compared to RM133.7/pax in 1H15. Hence, we are projecting 22% growth in CNP of RM275.9m, with an assumed overall yield of 18.4 sen/RPK and an average fuel cost assumption of USD64/bbl (40% of FY17E fuel requirement hedged at USD58/bbl), and we are not concerned over the new PSC charges given that AAX had proven to be able to raise their average fare by RM88/pax in 1H16, while charting an impressive passenger growth of 21%, YoY.

TRADING BUY. We value AAX at RM0.49 based on 8.0x FY17E PER at a mild discount to the applied valuation to AIRASIA of 9.0x due to its higher risk nature as a long-haul player which is exposed to greater fuel cost sensitivity compared to the short haul players. Currently, AAX is trading relatively cheap at only 6.3x FY17E PER compared to the other low-cost carriers in the region which is trading at an average of 9.3x. Hence, our TRADING BUY call on the stock is premised on its turnaround story and undemanding valuation.

Source: Kenanga Research - 30 Sep 2016