INVESTMENT HIGHLIGHTS

• FY18 performance remains in the red

• Volatility in oil price hit operating numbers

• RASK-CASK spread stays negative due to reduction

• AAX to strengthen market share in core markets specially Greater China

• Maintain NEUTRAL with adjusted TP of RM0.27 per share

FY18 performance remains in the red. AAX recorded net loss in FY18 to the tune of –RM312.7m. Excluding exceptional items, the normalised net loss of -RM219.2m, missed ours and consensus’ expectations by a variance of more than 10%. The negative variance was due to the increase in overall opex, as a result of the +28.0%yoy rise fuel expenses in FY18 and the provision for an impairment amount due from the joint venture.

Flattish growth in revenue. Revenue in FY18 was little changed, declining only by -0.4%yoy. Revenue from ticket sales, ancillary and lease income also showed flattish trend except for freight services which jumped +7.0%yoy. The freight services segment was supported by the introduction of Redbox logistics, its new logistics arm but contribution to overall revenue remains low at <10%.

Load factor maintained at the expense of lower fares. Although the +2.8%yoy growth in ASK outstripped the +1.9%yoy growth in RPK due to the introduction of four new routes, the average load factor was maintained above 80%. Load factor remained resilient despite the increase in frequencies to Honolulu, Hangzhou, Sapporo, Busan and Taipei. The strength in load factor was supported by passengers carried growing to a record of 6.2m in light of average fares which were lower by -5.3%yoy at RM477. A load active strategy stands well in handling competition but only positive in routes that reached over capacity.

Fuel price was the major culprit for losses. With average fuel prices rising by +34.7%yoy in FY18, fuel expenses climbed +27.9% higher. As a result, fuel costs made up 40% of total operating costs in FY18, +7ppts more compared to the year before. Consequently, the annual average RASK-CASK spread turned negative for the first time in three years. Looking ahead, AAX has embarked on more conservative hedging policy; increasing its average hedge ratio to ~50% in FY19 compared to ~14% in FY19.

Source: MIDF Research - 22 Feb 2019