KEY INVESTMENT HIGHLIGHTS

• Another round of losses at a higher level of –RM283.0m in FY19 compared to RM235.7m in FY18

• Revenue dipped on lower passengers carried but ancillary contribution remained robust at 18.6%

• Despite the capacity cuts, load factor in FY19 only increased by 0.6ppts from a year ago to 81.3%.

• Now forecasting a net loss in FY20 and FY21

• Maintain Trading SELL with a revised TP of RM0.08 per share

Another round of losses albeit at a lower level. AirAsia X Berhad (AAX) reported a 4QFY19 normalised net loss of –RM86.2m, reversing the losses seen in the preceding year. This brings its cumulative FY19 net loss to –RM283.0m (vs the RM235.7m net loss seen in FY18) which was below our and consensus’ full-year FY19 earnings expectations. The negative variance was due to the substantial increase in maintenance and also financing costs following the MFRS16 adoption. Moving forward, FY19 will serve as a new base with regard to the impact of the MFRS 16 adoption.

Revenue dipped on lower passengers carried. Revenue in FY19 dropped -3.9%yoy to RM4.39b due to a -1.6%yoy decline in passengers carried amidst capacity cuts and closure of non-profitable routes. Subsequently, ancillary revenue dropped by -4.0%yoy but still maintained a robust contribution to total revenue, at 18.6%.

Load factor remains above 80.0%. Meanwhile, both ASK and RPK declined by almost the same amount of -3.2%yoy and -2.6%yoy respectively in FY19. The lower ASK was specifically due to the replacement of longer stage routes with shorter stage routes. Despite the capacity cuts, load factor in FY19 only increased by 0.6ppts from a year ago to 81.3%. Therefore, we can deduce that AAX is facing headwinds to fill up capacity.

RASK and yields remain flat despite capacity cuts. RASK and yields marginally dropped by -0.6%yoy and -0.2%yoy respectively in FY19. This was despite deploying cuts in capacity growth while average stage length has shortened by -1.3%yoy for the year. These are supportive indicators for AAX to obtain more pricing power but were not as effective.

Impact of lower fuel price further amplified by prudent hedging policy. The average sector length declined by - 1.3%yoy in FY19 but fuel expense declined further by -10.4%yoy. We opine that AAX’s conservative hedging strategy mitigated any volatility from the market; i.e. geopolitical shocks. For 4QFY19, 86% of AAX’s fuel requirement was hedged at average Brent hedge prices of USD60.7pb while the average Brent crude oil was at USD62.7pb. The lower furl expense also helped AAX to narrow down its negative RASK spread to -0.3 in FY19 from -0.7 in FY18.

Actions taken in the wake of Covid-19 outbreak. Based on our preliminary analysis, we found that capacity catered for destinations in China by AAX make up between 25% and 45% of AAX’s total capacity. We understand passengers flying to or from destination in mainland China are given an option for a credit account or full refund. Meanwhile, South Korea and Japan combined makes up around 40% of AAX’s total capacity. Thus far, only Thai AAX has cancelled flights to South Korea from March 6 to March 27 due to the Covid-19 outbreak. In order to deal with the covid-19 outbreak, AAX has planned the cancellation of non-profitable routes such as Tianjin, Lanzhou and Jaipur. Management also guided that more than 600 flights will be cancelled in March 2020, covering eight destinations.

Earnings estimates. We are now forecasting a loss of –RM193.6m and for FY20F in view of its further capacity cuts and lower RPK in the coming quarters cushioned by renegotiation of lease reduction across entire fleet. As such, load factors for FY20 is expected to be in the range of 65%-75% That said, we are now expecting a smaller net loss of –RM77.4m in FY21F following: (i) cost reduction initiatives via digitalization; and (ii) the move towards dual fleet the strategy with Airbus A321 aircraft set to replace A330 for current routes between four to six hours. We have also introduced our forecasts for FY22.

Target Price. We changed our valuation method from PBV to PER basis in view of the expected losses amidst tough operating environment. As such we arrive at a new target price of RM0.08 per share (previously RM0.11). Our TP is derived via pegging our FY21F book value per share to a target PBV of 1.6x which is the five-year average.

Maintain Trading SELL. Premised on the precedent, passengers carried is expected to temporary decline during a virus outbreak. Hence, we are maintaining our Trading SELL stance. With regard to that, the current pandemic outbreak could potentially derail AAX’s plan to launch the four weekly flights from Kuala Lumpur to Okinawa via Taipei (KUL-TPE-OKA) in 1QFY20. 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. An upside risks for AAX includes a faster-than-expected recovery of the coronavirus outbreak.

Source: MIDF Research - 28 Feb 2020