INVESTMENT HIGHLIGHTS

• 12MFY16 earnings exceeded expectations

• Operational numbers were almost flawless

• No signs of slowing down in 2017

• IAAX aims to restart its operations by 1HFY17

• We maintain our BUY call on AAX with higher TP of RM0.56

12MFY16 earnings exceeded expectations. AirAsia X’s (AAX) full year FY2016 core net profit of RM248m was above both consensus and our forecast. The favourable variance in profits was predicated on better than expected RPK growth of +32%yoy against our forecast of +23%yoy. For the fourth quarter of 2016, AAX’s revenue breached the billionth mark at RM1.17b while core profits came in at RM127m which was a 2.1 fold increase over the similar period in 2015.

Operational numbers were almost flawless:

1. ASK, RPK and Load factors - The aggressive capacity addition in 2HFY16 paid off handsomely as full year ASK growth of +26%yoy was exceeded by RPK growth of +32%yoy leading to a +4ppt gain in load factors at 79%. 2. Average fares and yields - The robust expansion in demand helped average fares stay resilient, rising +12.5%yoy leading to a gain in yields of +4.8%yoy. 3. Operating expenses - CASK improved by 7.5%yoy despite higher average USD/MYR exchange rate in 2HFY16 due to better utilisation of aircraft and lower jet fuel cost. 4. Slight weakness in the middle-eastern segment - If we were to nit-pick on the 2016 results, a weakness would be from its others segment (New Delhi, Jeddah and Kathmandu routes) which recorded lower revenue by -10%yoy. We believe the Jeddah route could have seen increased competition from MAB and Malindo while the Kathmandu route could have been negatively impacted by the temporary ban on foreign workers. Having said that, the North Asian (+38%yoy) and Australasia (+47%yoy) segments which contribute 85% of revenue were more than enough to make up for the losses.

No signs of slowing down in 2017. AAX plans to increase its ASK by a further 25-30% in FY17 with better utilisation of its fleet. Notably, CEO Mr. Benyamin has identified daytime slots which are underutilised as flight schedules are currently skewed toward night departures which is a preference among travellers who prefer to sleep through the flight and wake up at their destination. We believe this is possible with an increase in longer duration flights such as KL-Auckland and KL-Hawaii which requires transiting in Gold Coast and Osaka respectively, hence making less of a difference for travellers. In addition, AAX sees further opportunities in China having launched daily KL-Wuhan flights beginning March 2017. We note that Malaysia targets to receive 3m Chinese tourists after registering 2.2m Chinese tourists in 2016 which was a +50%yoy improvement over 2015.

IAAX aims to restart its operations by 1HFY17. Having temporarily suspended its operations since September 2016, IAAX is in the midst of reapplying for its license and is aiming to begin flying North Asian routes in 1HFY17. Previously, IAAX operated out of Bali and faced difficulties particularly in the Australian market. AAX does not plan to inject additional capital into its associates as they believe that income from wet leases of its fleet of 2 Airbus A330 aircraft to Airasia Berhad for the peak travel season would be sufficient for its operations moving forward.

We maintain our BUY call on AAX with higher TP of RM0.56. We raise our FY17 and FY18 earnings forecast by 12% and 15% respectively as we increase our ASK and RASK assumptions. Hence, our target price is increased to RM0.56 pegged to unchanged forward price-to-earnings ratio of 8.5x FY17 EPS. We believe valuations for AAX are compelling as the stock currently trades at FY17 earnings of only 6.5x. We like AAX as we expect its robust capacity growth to be supported by healthy demand

Source: MIDF Research - 23 Feb 2017