INVESTMENT HIGHLIGHTS

• AAX incurred a core loss of –RM6.45m for 9MFY17

• 3QFY17 earnings weighed down by one-off item

• Demand for LCC is still robust

• 4QFY17 is expected to perform stronger

• Upgrade to BUY with an unchanged TP of RM0.43

Missed expectation. AAX’s 9MFY17 core earnings fell into negative territory, recording a core loss of –RM6.45m, against a profit of RM120.5m in 9MFY16. On quarterly basis, core profit was reported as -RM58.0m loss vs RM43.1m in the same period last year. As such, The result came in below ours and consensus full year estimates. Weakening MYR against USD, higher fuel expenses and doubtful debt provision steered AAX into a loss.

Earnings weighed down by one-off item. AAX’s 3QFY17 core losses were largely due to doubtful debt provision amounting to RM50.2m. At the same time, AAX saw an increase in its expenses which are USD denominated as the average Ringgit weakened against USD in the third quarter to average at RM4.26 in comparison to the same period last year which averaged at RM4.00.

Despite the losses, business was decent. The demand for long haul LCC appears stronger for AAX even in in the seasonally weaker third quarter. This was shown by encouraging trend in the ticket sales, ancillary and freight segments with at least ~+8.0%yoy incremental growth. For 3QFY17, AAX’s ASK grew +17.9% which was well absorbed with RPK rising +20.0%yoy leading to +1.0ppt gain from 78.0% last year. This was noted due to improvement across AAX routes especially in Chengdu as well as stronger marketing efforts.

RASK-CASK spread. On the flipside, RASK (yields) fell by -3.0% pursuant to the drop in average fares as well as an increase in ASK. With CASK climbing +6.1%yoy, this lead to a narrowing of RASK-CASK spread. Average fares likely to be under pressure in FY18 as a result of AAX embarking on a load active strategy to squeeze out its competitors.

4QFY17 results likely to be strong. Forward booking numbers indicate the demand is still strong, with load factor expected to hit all time high at 87.0% in December. However, we note that additional pressure on fare is likely on certain routes (e.g. Australia) as the group continues to strengthen its dominance in core market such as China, Australia and Malaysia.

Impact on earnings. Despite our strong outlook on AAX’ performance in the next quarter, we are prompted to adjust our earnings forecast downward which is deemed palatable at this juncture. Hence, we are revising down our estimates for FY17 and FY18 by -31.6% and -1.08% respectively factoring in higher overall operating expense.

BUY call with TP of RM0.43. Our target price is pegged to a forward FY18 price-to-earnings ratio of 8.5x. Our TP remains unchanged due to minimal changes of FY18 earnings forecast. Our buy stance is predicated on AAX’s aggressive capacity expansion through higher utilisation of aircraft through increasing frequencies and route network. Considering that the business prospects are on the mend, AAX capacity expansion move is strategic to benefit from long-term profitability.

Source: MIDF Research - 24 Nov 2017