INVESTMENT HIGHLIGHTS

• 9MFY16 earnings within expectations

• AAX recorded ASK growth of +20%yoy

• Associates are faring better

• Concerns on the weaker Ringgit overdone

• We upgrade AAX to BUY with TP of RM0.50

9MFY16 earnings within expectations. AirAsia X (AAX) 9MFY16’s core net profit of RM120.5m (+156%yoy) met our estimates but fell short of consensus representing 73% and 53% of forecasts respectively. Better load factors (+6ppt yoy), improving yields (RASK +8%yoy) and lower CASK (-6%yoy) kept the recovery story intact despite 3Q being seasonally weaker. Recall that AAX had suffered painful losses in FY14-FY15.

AAX recorded ASK growth of +20%yoy in 9MFY16, matching its target announced earlier in the year. We believe these additions have set the stage for an exhilarating 4QFY16 with forward load factors indicating healthy take-up rate despite the bulky capacity expansion. To recap, 6 new routes (KL-Delhi, KL-Auckland, KL-Tehran, KL-Mauritius, BKK-Tehran and BKK-Muscat) and frequency additions to China, Australia and Japan were added, signalling management’s optimism on demand.

Associates are faring better. Both TAAX and IAAX gained positive traction, with losses narrowing to US$1m (from: US$10.7m) and US$4m 1m (from: US$8m) respectively. TAAX recorded robust load factor of 85% strong demand from the North Asia sector, particularly Korea and Japan which together represent 67% of TAAX’s route network. We see upside for TAAX in terms of ASK and RPK growth from China which only represents 20% of its network. Meanwhile, IAAX is still in the midst of restructuring having wet leased its aircraft to IAA until March 2017.

Concerns on the weaker Ringgit overdone. Our positive view stems from AAX deriving 30-40% of its revenue in foreign currency denominations such as AUD and RMB. To note, Oct-Nov 2016 average USD/MYR exchange rate stands at 4.22, still below the 4.28 recorded in 4QFY15. Recall that despite the weaker Ringgit, AAX recorded core net profit of RM60m in 4QFY15.

Source: MIDF Research - 23 Nov 2016