AirAsia  X  is  scheduled  to  announce  its  1Q14  results  on  19  May.  We expect it to report losses for the quarter under review. Nonetheless,  the carrier’s  preliminary  statistics  show  good  progression  in  capturing  a larger market share. Depressed airfares  and the weaker MYR are among our main concerns. We upgrade AirAsia X to NEUTRAL  (from Sell) but retain our MYR0.70 FV.

• Preliminary statistics show good progression.  AirAsia X’s 1Q14 load factor inched up by 1.6ppts y-o-y to 85.8% despite a significant  63.1% yo-y  expansion in capacity.  We reckon this may be at  the expense of its yield to capture a larger market share.
• Results  are  expected  to  be  in  the  red.  AirAsia  X  is  scheduled  to release its 1Q14 earnings next Monday evening  (19 May). Based on the preliminary statistics,  as well as other external factors that  could  impact its  earnings,  we  forecast  for  a  possible  MYR21.9m  net  loss.  We  are imputing  a  drop  of  3.8  y-o-y  change  in  yield  for  1QY14,  as  the competition  among  airlines  gets  stiffer  and  AirAsia  X  is  still  offering promotional  airfares  to  its  new  destinations.  Total  fuel  consumption  is expected to escalate significantly, in tandem with its aggressive capacity expansion. Although  average jet fuel price  has eased by 11% y-o-y, the weakening  of  the  USDMYR  could  offset  such  a  favourable  factor.  The latter  is one of our concerns, which  may impact AirAsia X’s bottomline further.  We  do  not  expect  other  expenses  like  staff  costs  and maintenance expenses to jump abnormally,  as the  AirAsia Group is well known for its effective cost management.
• Overseas ventures on track.  Thai AirAsia X is expected to commence commercial  operations  in  June  2014  from  Don  Meung,  Bangkok  while Indonesia AirAsia X is expected to kick-start in 4QFY14, from Bali.
• Upgrade  to  NEUTRAL.  We  have  made  no  changes  to  our  earnings forecast,  pending  more  updates  from  AirAsia  X’s  1Q14  earnings announcement. We are upgrading the stock to NEUTRAL (from Sell), as the  share  price  has  dropped  sharply  and  we  believe  there  is  limited downside.  The  MYR0.70  FV  is  based  on  1.3x  FY14F  P/BV.  Our justification  of  such  a  P/BV  target  is  to  factor  in  its  leased  aircraft  as assets (at 20% equity funded) into its balance sheet.

AirAsia X 1Q14 Results Preview
Releasing results next Monday.  AirAsia X is  scheduled  to release its 1Q14 results next  Monday and we believe the airline  should  report healthy growth in topline but bottomline ought to remain under pressure.

Revenue expected to grow positively. For its topline, we are expecting this to grow at  the  rate  of  59.8%  y-o-y,  judging  by  the  preliminary  statistics  that  were  given  by management. AirAsia X is able to report a growth in load factor of 1.6ppts  y-o-y  to 85.8% – despite its aggressive seat capacity expansion of 63% y-o-y – with total fleet expanded to 22 aircraft vs only nine in 1Q13. We are imputing a decline of  3.8% y-oy for AirAsia X’s 1Q14 yield  due to aggressive discounts to maintain its load factor as it goes head-to-head against  other full service  carriers.  Malaysia Airlines (MAS MK, SELL,  FV:  MYR0.19),  for  instance,  is  aggressively  deploying  new  capacity  into Australia, ie  one of the key markets that AirAsia X  is seeing yields deteriorating.  We are maintaining the ancillary  revenue per passenger  at the same  level as per 4Q13 (at MYR143.28) to stay on the side of prudence.

Fuel  costs  and  forex  movements.  Fuel  consumption  is  expected  to  escalate sharply in 1Q14 on  a  y-o-y basis as a result of  aggressive capacity expansion. We are estimating a 45.3%  jump in total fuel expenses for 1Q14 after incorporating the increase  in  capacity  of  63%  y-o-y.  Jet  fuel  price  has  eased  by  11%  y-o-y  but  this favourable  condition  is  expected  to  be  mitigated  by  the  weakening  of  the  MYR against  the  USD. Weaker MYR/USD  is one of the major concerns  that  may impact AirAsia X’s forex  on borrowings.  In  4Q13, AirAsia X booked in a significant loss of realised foreign exchange losses of MYR97m  on  the fact that  the  MYR depreciated by  7.1%  y-o-y  at end-Dec 2013 vs end-Dec 2012  against the USD.  The  former  has continued to depreciate  by  5.5%  y-o-y  as at  end-March vs end-March 2013. Hence, we are estimating MYR53m in realised forex losses for 1Q14.

Not much changes on other controllable costs. We believe that other costs, which are controllable, should not have significant changes. We do not foresee a huge jump in  staff  costs  (other  than  increasing  headcount  due  to  expanded  capacity) ,  as  the AirAsia  Group  is  well  known  for  its  efficient  manpower  management.  Maintenance costs  may  inch  upwards  slightly  due  to  more  aircraft  joining  the  fleet  and  the weakening  MYR/USD,  but  this  may  not  be  a  huge  amount  as  such  aircraft  are relatively  young.  We  imputed  a  higher  other  operating  expenses,  as  we  expect AirAsia X to spend more on advertising for its new routes.

Overseas ventures.  Thai AirAsia X has  received  its second  Airbus A330-300 in Jan 2014  and  is  scheduled  to  commence  first  commercial  flight  in  June.  Don  Mueang Airport will serve as its operating hub in Bangkok, luring visitors from  South  Korea and Japan to the Thai capital, and complementing AirAsia Group’s connectivity to the rest  of  the  countries  that  Thai  AirAsia  operates  in. We  are  forecasting  for  start-up losses of MYR25m-30m  in FY14 for Thai AirAsia X. As for its Indonesia  AirAsia X, which  will  operate  from  Bali,  Indonesia,  this  has  gotten  the  approval  from  the authorities and is expected to commence  operation by end of 2014, with one  aircraft this year, and  additional  one  next year. The main market for Indonesia AirAsia X is the  Australian  market,  which  is  one  of  the  key  markets  for  AirAsia  X.  Bali  is  also known as a second home for Australians. The fleet expansion plans  for Thai AirAsia X and Indonesia AirAsia X are the same,  ie an  incremental of two  aircraft per year. We  have  yet  to  incorporate  any  forecasts  for  its  Indonesia  venture  pending  more clarity and time frame.

An opportunity to capture market share? Despite reporting losses, AirAsia X is still expanding aggressively to capture larger market share for its operations.  The media has been reporting that its long haul competitor  –  Malaysia Airlines  –  has  indicated that it  will undergo  a  restructuring  to bring  back  the  airline  to  profitability.  This,  we suspect,  may  include  cutting  loss-making  routes  and  reducing  capacity.  This  is actually  positive  for  AirAsia  X  in  the  short-  to  mid-term,  as  it  is  ready  to  capture  a larger market share and, possibly, maintain its airfares as competition  possibly eases. Nonetheless,  Malaysia Airlines  has yet to come out with any concrete restructuring plans or announcement yet.

Bottomline  should  still  be  in  red.  Based  on  the  assumptions  and  discussions above,  we  are  expecting  AirAsia  X  to  report  a  positive  growth  on  its  EBITDA  and EBITDAR lines. However, after imputing expenses from depreciation and leasing, as well as forex losses on borrowings, we are projecting a core net loss of MYR21.9m for AirAsia X (see Figure 1). We have kept our full-year earnings forecast unchanged at  this  juncture  and  should  make  the  necessary  adjustments  after  the  earnings announcement on Monday.  The share price  has  come down sharply (-25.3%) since February after releasing  its  poor  4Q13 results  and we see limited downside risk at this  level,  as  we  believe  the  market  has  pretty  much  factored  in  the  potential weakness on its earnings. Thus, we are upgrading AirAsia X to NEUTRAL (from Sell)with  a  FV  of  MYR0.70  that is  pegged to 1.3x FY14F P/BV. We are of the view that AirAsia X’s numbers  should  remain weak in 1H14,  but we  ought to  be able to see more positive recovery in 2H14. Moving forward in FY15F, AirAsia X should start to report  healthier set  of  numbers,  as  its  markets  start  to  mature  and  yields  begin  to improve further.

Source: RHB