KEY INVESTMENT HIGHLIGHTS

• Decline in ASK outpaced the drop in RPK in 3QFY19 amidst ongoing capacity management

• Load factor in 3QFY19 remains strong at 81.0%

• Additional flight frequencies was insufficient to boost overall capacity

• AAX Thailand saw a 77.0% drop in load factor due to new routes in Japan

• Earnings estimates revised to take into account of change in Brent crude price, USD/MYR and lower capacity growth

• Maintain NEUTRAL with a revised TP of RM0.17 per share

3QFY19 preliminary ASK and RPK took a breather. In 3QFY19, AirAsia X’s ASK declined by -3%yoy outpaced the -2%yoy dip in RPK. This was due to seasonal capacity management which saw the total capacity (-3%yoy) declined more than the number of passengers carried (-2%yoy). The destinations involved were Sapporo and Taipei in response to weaker demand during the leanest season of the year for these routes. As such, AAX’s load factor remained reasonable at 81.0%, +1ppts higher than a year ago.

Average stage length remained flat. Flight frequencies were increased to Gold Coast, Sydney and Melbourne to cater for increased demand following the term holidays in Australia. However, this was insufficient to boost overall capacity, causing AAX’s average stage length to remain flat on a yearly basis in 3QFY19. Meanwhile, we expect some benefits of AAX’s prudent hedging policy to be realised in 3QFY19 following the average -13.0%yoy drop in the Singapore jet kerosene price during the same quarter, effectively bringing the Singapore jet kerosene price lower by -12.0%yoy on average for 9MFY19.

AirAsia X Thailand faces blip in load factor. For AAX Thailand, the +32.0%yoy increase in passenger carried in 3QFY19 was underpinned by additional seat capacity and inauguration of fifth destination in Japan, Fukuoka in July 2019. Nevertheless, the ASK grew at a faster pace of +48%yoy due to higher capacity, leading to a decline of 10ppts in load factor to reach 77% in 3QFY19.

Earnings estimates. We are imputing a lower jet fuel estimates as our Brent Crude oil estimate for FY19 has been lowered from USD63pb (previously USD70pb). Nonetheless, the effect of lower estimated fuel expenses is moderated by a higher USD/MYR rate of 4.15 (previously 4.08). In addition, we have also taken into account of a lower growth in capacity amidst its ongoing network rationalisation exercises in its key markets. As a result, we are now forecasting a slight loss of –RM8.1m for FY19 and lower earnings forecast of RM45.6m for FY20. We expect FY20 to see support from the ancillary segment, i.e. WIFI onboard and Teleport.

Target Price. We revised our target price to RM0.17 per share (from RM0.19 previously) following the adjustment in earnings. Our TP is derived via pegging our FY20F EPS of 1.10sen to a target PER of 15.0x, which is the average PER of global low cost carrier peers.

Maintain NEUTRAL. The lower PSC of RM50 for international departures ASEAN will deliver additional boost to the current travelling trend. Notwithstanding this, we believe the ongoing capacity deployment will remain a headwind for the rest of FY19. This is in addition to the adoption of MFRS 16 will be a hurdle as the majority of AAX’s fleet are leased, with gains from lower amount of interest to be realized beyond the fifth year of the lease term. On a bright note, we expect AAX’s ‘Teleport.social’, a platform enabling sellers on social media to integrate with Teleport’s logistics infrastructure to realise full year benefit in FY20. All in, we maintain our NEUTRAL call with a revised TP of RM0.17 per share.

Source: MIDF Research - 21 Oct 2019