INVESTMENT HIGHLIGHTS

• AAX could increase ASK by another +30% in 2017

• Malaysia and China are key markets in 2017

• AAX could face pressure on yields amid capacity expansions

• Natural hedges reduces exposure to the Ringgit

• We maintain our BUY call on with TP of RM0.50

We attended AAX’s 2017 investor day which was hosted by Mr. Benyamin Ismail (CEO), Ms. Cheok Huei Shian (CFO), Mr. Hanif Idrose and Mr. Ivan Alias (Investor Relations). The meeting was well attended by analysts and included a tour of Airasia Group’s new corporate headquarters (Airasia RedQ).

CAPACITY EXPANSION

AAX added 3 aircraft on a net basis in 2016, bringing its fleet size to 30 aircraft. ASK growth resumed in FY16 and would likely exceed +30%yoy in FY16 after falling -6%yoy in FY15. Henceforth, AAX’s fleet will stay unchanged until early-2019 when it takes delivery of A330neo aircraft being the first airline to fly the new variant.

Despite not adding any new aircraft in 2017, AAX could still increase ASK by another +30%. The increase in ASK could come from higher utilisation of aircraft from an average 15.4 hours in 2016 to 16.5 hours by 2H2017. In addition, AAX could reduce its wet lease operations to both its parent Airasia Berhad and external parties. Meanwhile, AAX does not rule out the possibility of leasing or purchasing older A330ceo aircraft should demand growth outweigh supply growth by a reasonable margin.

DEMAND GROWTH

The domestic outbound market remains the largest contributor to AAX’s revenue at 65%, followed by China and Australia. We believe that AAX’s load factor in 4QFY16 could have matched 4QFY15’s 83% as travellers set aside concerns on the weaker Ringgit to travel abroad amid an improvement in consumer sentiment. This is encouraging considering that capacity rose +30%yoy.The positive traction in load factor could extend into 1QFY17 with load factor for January 2017 potentially reaching as high as 90% due to the CNY holidays. This would indicate that demand remains resilient, in spite of headwinds such as the passenger service charge (PSC) hike amounting to RM18 which makes up 3.4% of 9MFY16’s average fare of RM531. Also, this supports our view that consumers have become less elastic to price changes for travel as the PSC hike was passed on to consumers.

We surmise that the North Asian sector, with China in particular to be AAX’s most important sector in 2017. Currently, AAX flies to 7 destinations in China making up 24% of AAX’s total network of 29 destinations. Both Airasia Berhad and AAX have built a presence in the Chinese market, being the largest Southeast Asian LCC with a 55% market share (source: IATA). Through Jan-Sep 2016, Chinese tourist arrivals increased an annual +41.2%yoy totalling 1.6m arrivals and would likely exceed 2.1m for the full year. Meanwhile, this figure is forecasted to expand by +50% in 2017 with a 3m target. We do not think this target is far-fetched considering Malaysia-China ties have reached new highs. This would bode well for AAX which has scope to increase flight frequencies and potentially 2 new routes to secondary cities.

PRESSURE ON YIELDS EXPECTED

Amid AAX’s planned capacity increase, we expect the company to face some pressure on average fares which could affect yields (RASK). In addition, competitors are also set to expand capacity at a double-digit growth rate in 2017 with MAB potentially adding 5 to 6% and Malindo adding 10 new aircraft to its fleet. Allaying some of our concerns, management noted that they are currently not experiencing major fare dumping by competitors as the industry shifts its focus on becoming profitable. In addition, we gather that AAX could be better positioned to face increased competition as its net gearing has come down significantly to 0.78x as at 9MFY16 (FY15: 1.77x). Moreover, AAX does not have any new aircraft coming into its fleet until 2019.

CURRENCY AND FUEL PRICES

Ringgit weakness shielded by natural hedge. AAX derives 35% of its revenue in foreign currency denominations such as AUD and RMB reducing the impact of the weakening Ringgit. To further cushion the impact of FX volatility, AAX has embedded the rise in costs associated with the weakness in the Ringgit to average base fares to provide further buffers.

The bulk of fuel requirements hedged in 2017. AAX has hedged 74% of its jet fuel requirements at US$60/bbl with the spot market currently trading at US$65/bbl. This gives AAX time to ride the current volatility in oil prices before adjusting to face future potential rises in fuel costs.

OUR CALL

We maintain our BUY call on AAX with TP of RM0.50. Our valuation is pegged to 8.5x FY17 earnings, similar to our valuation of Airasia Berhad. We believe valuations for AAX are compelling as the stock currently trades at FY17 earnings of only 6.8x. We like AAX as we expect its robust capacity growth to be supported by healthy demand.

Source: MIDF Research - 11 Jan 2017