2Q14 results will be released on 19th Aug. Expect core net loss of MYR133m (+434% YoY, +120% QoQ).

Lower load factor, weak yields, and higher unit cost were the main culprits.

Take profit with a lower MYR0.72 TP (from MYR0.79); 2Q14 losses will stretch Company’s capital structure. SELL.

What’s New

AirAsia X’s 2Q14 operating statistics were satisfactory; passengers carried grew by 46% YoY with a slightly lower load factor of 80.4% versus 81.8% in 2Q13. QoQ however, passengers carried was down 6% while load factor weakened by 5.5ppts. Consequently, we expect AirAsia X to report record losses in the period due also to weaker yields and higher unit cost due to the stronger MYR.

What’s Our View

AirAsia X’s strategy of aggressive growth coincides at a time when the market is soft and overcapacity is at its peak. Furthermore, the MH370 incident has led to a drop in consumer sentiment and resulted in severe yield deterioration. We expect 2Q14 core net loss of MYR132.9m, a fourfold increase from 2Q13’s losses of MYR24.9m, and double 1Q14’s losses of MYR60.3m. This would be below ours and consensus expectations.

As at end-2Q14, we estimate the Company would be left with critical cash of <MYR50m and net gearing would have soared to >2.0x (versus 1.6x in end-1Q14). The Company’s capital structure is at stretched levels and this has raised the risk and probability for new equity issuance within the next 12-months.

We now project AirAsia X to make a core net loss of MYR113.8m in FY14 (from a loss of MYR67.1m previously) due to the weak 2Q14. Our FY15/16 earnings are cut by 13.3%/8.8%. We advise investors to take profit after a strong rally in its share price; our new TP of MYR0.72 (from MYR0.79), is based on unchanged FY15 P/BV of 1.0x  

Source: Maybank Research - 14 Aug 2014