AAX rose 1.5 sen (4.1%) yesterday to finish at RM0.385 on high volume (25.8m shares). Earlier on Tuesday, the company hosted an Investors’ Day at AirAsia’s new headquarters (RedQ), highlighting AAX’s strategy moving forward with a tour of the new office.

Key takeaways include: (i) AAX’s plans to maintain market dominance in first-tier cities in China (Beijing, Shanghai and Chengdu) over local players (MAB, Malindo) by maintaining favourable time slots for departures and arrivals within airports that are operating close to full capacity, (ii) management is mulling new routes within AAX’s largest revenue destination – Australia, (iii) AAX sales unaffected by new airport tax rates despite maintaining the same base price, (iv) the company aims to increase capacity by increasing utilisation of planes from 15 hours to 16 hours, and (v) AAX plans to further grow their ancillary income through new offerings such as on-board WIFI and Twin seats configuration.

From a charting perspective, AAX’s share price is showing early signs of bottoming out in the short-term. From here, we expect a retest of the RM0.40 (R1) reaction high (16 Dec 2016). Should this resistance level be taken out, AAX would then confirm what resembles a mini “Double Bottom” before a possible move up to the RM0.445 (R2) level. Investors who wish to gain a leveraged exposure can consider AAX-C2 (strike RM0.50) which currently offers an effective gearing of 3.5x. This means that a 15.6% gain in the underlying price to RM0.445 (all else remaining the same) translating to an upsized gain of 55% for AAX-C2.

Structured Warrant Strategy:

Currently, there are 10 structured warrants available for AAX, all of which are priced at narrow bands of 81-101% implied volatility. However, since we expect AAX to climb towards RM0.455 over a 1-2 months timeframe, we see AAX-C2 (strike RM0.50), AAXC3 (strike RM0.41) and AAX-CY (strike RM0.40) as best suited for this trading strategy.

Source: Kenanga Research - 12 Jan 2017