KEY INVESTMENT HIGHLIGHTS

• Another round of losses albeit at a lower level of – RM196.8m (-17.5%yoy).

• Revenue dipped on lower passengers carried but ancillary contribution remained robust at 19.0%

• Network and capacity realignment managed to keep load factor reasonable at 81.0%

• Expecting to turn back profitable in FY20

• Maintain NEUTRAL with an unchanged TP of RM0.17 per share

Another round of losses albeit at a lower level. AirAsia X Berhad (AAX) reported a 3QFY19 normalised net loss of –RM52.6m. This brings its cumulative 9MFY19 net loss to –RM196.8m (-17.5%yoy lower compared to the net loss a year ago) which is below our and consensus’ full-year FY19 earnings expectations. The negative variance was due to the substantial increase in financing costs following the MFRS16 adoption. We expect the effect to be until end of FY19 when a new base will be established. The losses in 3QFY19 compared against 3QFY18 normalised net loss has narrowed, whereby it had improved by - 76.0%yoy. This was mainly due to lower user charges and other operating expenses in 3QFY19.

Revenue dipped on lower passengers carried. Revenue in 9MFY19 dropped -6.4%yoy to RM3.20b due to a -4.6%yoy decline in passengers carried amidst capacity cuts and closure of non-profitable routes. Subsequently, ancillary revenue dropped by -5.2%yoy but still maintained a robust contribution to total revenue, at 19.0%. Looking ahead, AAX will boost a stronger take-up of ancillary offerings especially with the expected introduction of WIFI onboard its fleet. While the freight services segment was lower at -4.2%yoy in 9MFY19, we opine that revenue will improve following the commencement of Teleport.social in 4Q19, which enables sellers on social media to integrate with Teleport’s logistics infrastructure. In essence, the platform itself will eliminate the need for online sellers to migrate to a specific market platform to sell their product.

Load factor remains above 80.0%. In line with the drop in revenue and lesser passengers carried, both RPK and ASK fell in 9MFY19. The - 4.9%yoy decline in RPK outstripped the -4.5%yoy drop in ASK for 9MFY19. This was due to latest seasonal capacity management which involved Sapporo and Taipei in response to weaker demand during the leanest season of the year for these routes. Meanwhile, higher frequencies were added to Australia (Gold Coast, Sydney and Melbourne to cater term holiday demand. As such, AAX’s load factor remained reasonable at 81.0%.

Source: MIDF Research - 14 Nov 2019