• FV range of MYR1.90-2.25. With the promising outlook for air transport and the consolidation of Capital A's short-haul aviation business, AirAsia X is set to become the leading low-cost carrier in the Asia-Pacific. Access to Capital A's orderbook, including long-haul narrowbody aircraft, will enable AAX to expand and efficiently deploy its fleet post acquisition. The stock is undervalued – it is trading at 1.1x P/BV, below the historical mean of 1.4x.

• Asia-Pacific – the fastest growing air transport market. The International Air Transport Association (IATA) expects the global air transport market to grow by 10.4% this year, with the Asia-Pacific to see a 17.2% YoY growth in passenger numbers in 2024 (2025F: +12.1% YoY, 2026F: +8.1% YoY). This offers significant opportunities, as the consolidation of Capital A's short-haul aviation business will strategically position AAX to be the Asia-Pacific market leader among low-cost carriers, given its strong foothold in the region.

• Leading low-cost carrier in the Asia-Pacific. Adding the AirAsia brand to AAX will expand its route network to over 140 destinations across 22 countries, with the capacity to accommodate c.60m passengers. With consolidated short-haul and long-haul networks, AAX can capitalise on its connecting flight services ie Fly-Thru, bridging short-haul and long-haul routes. The increase in connectivity offers greater flexibility for long-haul travellers, enabling AAX to strengthen its foothold in Asia.

• Access to Capital A's aircraft orderbook. The acquisition will provide AAX immediate access to Capital A's sizeable Airbus orderbook, with 362 A321neo aircraft scheduled to be delivered over the next decade. Over the next five years, 73 aircraft will be delivered – financing for these is already in place through a sale-and-leaseback arrangement.

• AAX can leverage on the orderbook's flexibility to convert A321neo orders to other variants like A321LR, A321XLR, or A330neo. Fleet diversity will enable AAX to deploy the right aircraft and capacity to match demand. This also enables it to explore new routes, by starting with narrowbody aircraft and transitioning to widebody capacity as the markets mature. This would be made possible through deploying the A321XLR, the A321neo variant that can fly up to c.4,510 nautical miles, ie adequate range to service many more Asian destinations that were beyond the reach of the older aircraft.

• Optimising costs with fleet rationalisation. The A321neo will gradually replace the current narrowbody A320s and some of AAX’s widebody A330s. This will enable the carrier to benefit from bulk buying spare parts and lower maintenance costs, due to aircraft type commonalities across its fleet.

• Valuations and forecast. Our FV is based on a target EV/EBITDA of 5.5x on FY25F EBITDA, assuming: i) Load factors of 81%, 86% and 84% for FY24, FY25 and FY26; ii) a combined fleet of more than 260 aircraft by end-2026 and estimated passengers of 3.7m in FY24, and ii) 65.5-67.6m passengers post-acquisition in FY25 and FY26. Key risks include unforeseen events affecting air travel, fuel price fluctuations and adverse FX movements.

Source: RHB Securities Research - 23 Sept 2024