INVESTMENT HIGHLIGHTS

• AAX reported a +4.4%yoy net profit in 1QFY19 but in the red after excluding exceptional items

• Load factor maintained at the expense of lower average fares

• Nonetheless, fuel expenses declined -12.5%yoy despite the rise in jet fuel price

• Termination of non-core routes to improve aircraft utilisation and RPK moving forward

• Revise earnings downwards to take into account of the MFRS16 adoption

• Maintain NEUTRAL with an adjusted TP of RM0.22 per share

MFRS16 pushed financing costs higher. AAX reported a net profit of RM43.3m in 1QFY19 (+4.4%yoy). Excluding exceptional items such as deferred taxation and foreign exchange losses, AAX recorded a normalised net loss of –RM30.1m, missing ours and consensus’ expectations by a variance of more than 10%. The negative variance was due to the substantial increase in financing costs following the MFRS16 adoption coupled with higher maintenance and overhaul expenses amidst a few aging fleet of five to six years.

Revenue declined on lower passengers carried. Revenue in 1QFY18 dropped -8.1%yoy to RM1.17b due to a -4.8%yoy decline in passengers carried. Subsequently, ancillary revenue was reduced by -5.0%yoy but still maintained a robust contribution to total revenue, at 22%. While the freight services segment was lower at -7.8%yoy, we opine that revenue will improve following the arrangement of Teleport (AirAsia Group’s logistics arm) with Oman Air to provide customer with access to Oman Air’s network covering Africa, the U.K. and Europe.

Load factor maintained at the expense of lower fares. In line with the drop in revenue and lesser passengers carried, both RPK and ASK fell. The -5.9%yoy decline in RPK outstripped the -4.5%yoy growth in ASK for 1QFY19. This was caused by the capacity deployed to shorter stage routes following the termination of Tehran, Male and Kathmandu routes during 1QFY18 and most recently, Auckland in February 2019. The load factor still remained healthy at 83.0% for the quarter under review but this came at a cost of average fares which were lower by -2.7%yoy. A load active strategy stood well in handling competition but only positive in routes that reached over capacity.

Source: MIDF Research - 17 May 2019