We  had  a conference call with  AAX’s  Management  yesterday  following its 2QFY13 results announcement on 20 Aug. The  carrier briefed us on certain  key  areas,  which  include  future  expansion  plans,  addressing concerns on forex exposure and fuel hedging, as well as guiding us on its  yields  moving  forward.  We  make  no  changes  in  our  forecast  and maintain our BUY recommendation with FV of MYR1.65. 
 
- Key  highlight  in  2Q13.  AAX’s  stronger  topline  was  due  to  higher revenue  per  available  seat  kilometre  (RASK)  and  stable  load  factor coupled  with  improved  yields.  Management  highlighted  that  its  FLY-THRU  fee  was  the  main  contributor  to  the  increase  in  ancillary  income and  that  losses  on  its  North  Asia  routes  were  mainly  due  to  seasonal factors as well as start-up costs for its new Shanghai route. AAX’s losses on  its  Middle  East  route  (ie  Jeddah),  meanwhile,  were  not  due  to  any structural  change,  rather  it  was  largely  attributed  to  the  cancellation  of flights  in  April  from  Muslim  Malaysians  opting  to  stay  home  for  the  13thGeneral Election and not going for their umrah as originally planned.

- Expansion  plans  next  year.  AAX’s  primary  focus  next  year  will  be  on expanding  into  Japan  (most  likely  Nagoya)  and  to  start  off  one  or  two new  China  routes  to cities like Chongqing, Xi’an or Wuhan. Meanwhile, applications to operate from Thailand and Indonesia are progressing well and  Management  is  targeting  to  launch  a  new  hub  by  early  2014, followed by another in the later part of next year.

- Addressing  forex  and  fuel  concerns.  AAX  is  attempting  to  reduce  its exposure  to  the  USD  by  undertaking  long-term  borrowings  in  other currencies  like  the  JPY.  Management  also  guided  that  50%  of  its  long-term  borrowings  are  hedged.  Furthermore,  AAX  said  that  27%  of  its 4Q13 jet fuel is hedged at USD123 per barrel and that 11% of its forward bookings in 1Q14 are hedged at USD116 per barrel. 

- Yield  guidance.  Management  thinks  that  yields  for  FY13  will  be  about the same as in FY12, based on the carrier’s ongoing routes.

- Maintain BUY. AAX’s capacity is expected to grow significantly and we believe  that,  with  its  dynamic  pricing  strategy  and  effective  cost management,  the  carrier  should  be  able  to  deliver  promising  numbers. We maintain our BUY call, with FV MYR1.65 also unchanged, pegged to 8.5x adjusted FY14F EV/EBITDAR.

Source: RHB