AirAsia X reported a MYR21.2m core net loss for 1Q14 from a profit in 1Q14, ie well within our estimate but below consensus. Australia remained a challenging route whilst margins for its North Asia routes improved. We expect AirAsia X to remain in the red, with 2H posting stronger earnings recovery on seasonality. We maintain our NEUTRAL  call and MYR0.70 FV, which is premised on 1.3x FY14F P/BV.  

• In line. AirAsia X reported a 1Q14 core net loss of MYR21.2m (1Q13: MYR86.4m profit), ie within our expectation but below consensus. No change in earnings was made. The 40% y-o-y increase in revenue was driven by a 22% increase in seat capacity, as more aircraft were added for new routes and additional frequencies.
• Yields and unit costs yet to improve. Passenger yields, as measured by revenue/revenue passenger kilometre (RPK), dropped 19.6% y-o-y, diluted by lower yields on promotional airfares for new routes and additional frequencies, coupled with intensifying competition. Average ancillary income per passenger dropped 4% y-o-y, as more Asian passengers (who typically do not spend much on ancillary services) represented a higher proportion in the Australia routes. Its 1Q cost per average seat kilometre (ASK), ie costof available seat available (CASK), came in higher by 8% y-o-y, mainly due to the depreciating MYR vs the USD for fuel expenses. Other unit costs, eg advertising and staff expenses, came down on economies of scale. Operating cash flow grew healthily at MYR131.6m y-o-y (from MYR40m), given its expanding fleet base, which boosted revenue. Margin wise (at EBITDAR), its North Asia routes improved, while the Australia routes continued to be loss-making.
• Outlook. Capacity increase should be mostly deployed on additional frequencies and the three new routes in North Asia. The carrier plans to undergo a tactical capacity reduction on its Australia routes temporarily,most likely due to low demand. AirAsia X should shift capacity on these routes to cater for more charters and leases. Management guided that other carriers are also reducing capacity on their Australia routes. As expected, the commencement of KLIA2 should allow it to improve its yields (by attracting more premium passengers) as well as improve costs on reduced fuel burn due to improved flight operations. 2Q is typically the weakest quarter for carriers and we expect AirAsia X to remain in the red in 1H with 2H posting stronger earnings recovery on seasonality.
• Maintain NEUTRAL. Our MYR0.70 FV is premised on 1.3x FY14F P/BV. Our 1.3x P/BV target factors in its leased aircraft as assets (at 20% equity funded) into its balance sheet. 

Source: RHB