As AirAsia X’s 9M14 earnings were below expectations, we maintain SELL with a lower TP of MYR0.57 (from MYR0.68, 1.5x FY15F P/BV, 11.6% downside). Earnings continued to come under pressure due to weakening passenger yields and escalation of costs. Airline incidents compounded the already intense operating environment but management is confident that the situation will improve.

3Q14 numbers below expectations. AirAsia X’s 9M14 net loss of MYR340m (->100% YoY) came in below our and street estimates, mainly due to declining yields as a result of airlines incidents. In 3Q14, the overall yield as measured by revenue/revenue passengers per kilometres (RPK) dropped by 15% YoY. This was coupled with a drop in ancillary revenue per passenger of 6% YoY due to the change in the composition of passengers. Its cost per average seat kilometre (ASK) for the quarter, ie cost per available seat kilometre (CASK), rose by 13% YoY, mainly due to an increase in staff headcount, aircraft fuel expenses, maintenance as well as higher operating lease expenses on the back of an increase in capacity of 24% YoY

4Q yield may improve. Management guided that yields have been improving post the MH17 incident and believes that yields in 4Q should grow stronger. This, coupled with lower jet fuel costs, could lead to a positive set of results for AirAsia X in 4Q14 and 2015, it added. AirAsia X will continue the tactical redeployment of its aircraft, ie by wet-leasing some to third parties, to improve overall income and maximise the utilisation of its planes. It plans to consolidate its backroom operations with AirAsia Group to improve productivity and margins. Management also highlighted that it will defer its aircraft deliveries to manage capacity growth in order to improve overall yields. It is confident about the outlook for its current cash level and may not need to raise cash from the market at this juncture – it has options to raise cash through debt (possibly via convertible bonds) and plans to do a sale and leaseback of two of its aircraft in FY15 to improve its cash position

 Management guided for capacity growth to slow down to 8% in 4Q14 and 5% for FY15 
 Continued unit-cost reduction for controllable items expenses 
 It expects yields to recover and aims to control CASK expansion to improve profit margin 
 Deferred tax for FY14 to be lower than in FY13 as AirAsia X is imputing fewer aircraft into its balance sheet 
 We adjust our earnings forecasts based on management’s guidance on capacity growth and realign other items to reflect its business 
outlook

Financial Exhibits

SWOT Analysis

Company Profile

AirAsia  X is the  long-haul  low-cost carrier  of  the  AirAsia  Group.  The  airline  flies to  16  destinations to/from  cities  in  Australia,  Japan, Korea, Taiwan and China. It also flies to Kathmandu, Nepal and Jeddah, Saudi Arabia

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Source: RHB