INVESTMENT HIGHLIGHTS

• Net profit grew tremendously

• Despite pressure from higher opex

• Encouraging recovery among associates

• Target price of adjusted to RM0.47 (from RM0.46)

Posted strong 1QFY18 profit. AAX net profit in 1QFY18 recorded strong growth of >+100%yoy, at RM41.5m. Stripping out exceptional items, the core net profit of RM61.8m was 27.6% and 34.8% of ours and consensus’ expectations. Healthy load factors (84.0%), improving CASK (-1.8%yoy) and strong associates’ performance led to positive variance of 1QFY18 earnings results.

Growth in revenue by +7.2%yoy was mostly driven by ticket sales (+8.4%yoy), ancillary (+7.2%yoy) and freight services (+31.4%yoy). Notably, 1QFY18 revenue came in highest since inception at RM1.27b vis- à-vis 13.3% growth of passengers carried. Ancillary income per pax (including freight services) eased by -2.0%yoy to RM169.00. However, we opine this performance as decent considering the bulky ASK expansion.

ASK growth of 10%, to cater new market... Management kept its strategy intact, focusing on high growth market in North Asia. This was seen through the addition of flight frequencies in Hangzhou (from 4x to 6x weekly) and Taipei (from 18x to 19x weekly). Aside from increased frequencies, two new routes were introduced namely Jaipur and Jeju. The commencement of new route was partly a result of capacity realignment from loss-making route such as Tehran.

…putting short-term pressure to yield. Given the infancy status of these two new routes, management are aware of the challenges to improve yield. Accordingly, RASK declined in 1QFY18 by -2.0%yoy to 13.88sen. Despite the drop, we believe RASK will rebound in due course underpinned by stronger demand considering that AAX is the only low cost carrier to offer direct route from Kuala Lumpur to the Jaipur city.

Improvement in CASK, driven by cost efficiency. Following notable growth in the company’s ASK, CASK improved by -2.0%yoy. This was despite external pressure of higher fuel price (by +33.0%yoy) and higher fuel consumption due to the increased capacity. Thus far, fuel price averaged at USD88/bbl vs. USD66/bbl last year.

Associates fared better last quarter. Both TAAX and IAAX gained positive traction, with profits recorded at USD21.9m and losses narrowing to US$2m (from: US$10.7m) in 1QFY18 respectively. TAAX recorded robust load factor of 94% supported by strong tourism demand in Thailand. We see upside for TAAX in terms of ASK and RPK growth from China which only represents 20% of its network. Meanwhile, IAAX’s performance was commendable considering the low season in Indonesia.

Maintain our BUY call. We expect full year earnings to be strong given its solid start for the year. We believe the company is able to sustain this momentum on the premise of robust travel demand, efficient capacity management and cost discipline practice. While we are aware that rising fuel price is a downside risk to the company’s earnings, we believe that demand for air travel will still be intact and be a compensating factor. Notably, international flight fare could go higher especially for full-service airline, following the increase in fuel price. Accordingly, we believe the situation will drive more passengers to opt for a more affordable option to travel. This will place AirAsia X to benefit given its robust route network and better capacity internationally. All-in, we maintain our BUY call with a revised TP of RM0.47 rolling forward our valuation to FY19, pegging its EPS to PE of 8.5x.

Source: MIDF Research - 23 May 2018