AirAsia X’s losses were worse than expected on poor loads and higherthan expected non fuel costs. We cut earnings and downgrade to SELL with a MYR0.155 TP (14% downside). Forward outlook for yields remains in a positive trend but load factor shows no signs of major improvements. Turnaround may take slower than expected as long haul travel demands may be hurt on the weak macroeconomic outlook.

Hit by currency woes. AirAsia X’s core losses came wider than we and street had anticipated. This is on the back of a depreciating MYR bumping up its non-fuel costs (namely maintenance and lease expenses) coupled with poor load factr – down 14ppts to 67% on the Middle East Respiratory Syndrome (MERS) outbreak in South Korea and the Nepal earthquake – despite lower average jet fuel prices (-37% YoY) and an improving yield environment (+9% YoY). 2Q15 core losses widened to MYR183m (YoY: +19%, QoQ: +240% ) bringing 1H15 core losses to MYR236m (YoY: +12%).

Key briefing highlights. Forward outlook for yields appears to be on a continued positive trend in the seasonally stronger 2H and on the back of Malaysian Airline System’s (MAS) capacity cuts. However, AirAsia X’sload factor shows no sign of major improvements (see Figure 4). It has also taken measures to reduce potential excess capacity by deferring its aircraft deliveries, taking in only two next year (four previously) and cancelling five in FY17 and three in FY18. Pipeline route launches on the Malaysia side is Hawaii, targeted for launch sometime in November. On its associates side, more destinations to China are expected on top of Bangkok to Iran, Russia and Australia, and Bali to Jeddah, Brisbane, Auckland, Tokyo and China. Hedge position to date remains relatively unchanged at 56% on average for the full year at USD88.30/barrel (bbl)while FY16 remains unhedged. Management maintains its view that the seasonally stronger 2H is expected to see improvements on the back of stronger yield recovery and improvement in loads.

Slower turnaround, downgrade to SELL. While EBITDAR numbers have shown improvements, we see the turnaround taking slower than expected on the deprecating MYR, which could dent long haul travel demand. We now forecast for wider losses in FY15 (+130%) and FY16 to still be in a loss of MYR28 (vs MYR154m earlier) with profits only foreseen by FY17 (MYR38m). The earnings downgrade is a combination of higher USD/MYR assumptions and weaker load factor, although some of these are offset by the lower jet fuel price assumptions (see Figures 2 and 3). We downgrade the stock to SELL (from Buy) with our TP reduced to MYR0.155 based on 0.8x forward P/BV (from 1.5x) on risks of earnings coming in lower than expected ahead.