Investment Merits

• Continuing trend of earnings recovery/growth

• Strong capacity expansion of 25% in 2017

• Slower but continuing improvements in revenue yield

• 74% hedged jet fuel for 2017 provides good visibility on costs

• Sustained recovery in earnings for associate airlines

• Compelling, below peers’ P/E and EV/EBITDA valuations

Company Profile

AirAsia X is the long-haul, low-cost affiliate carrier of the AirAsia Group. It operates a core fleet of 30 A330-300s as at Dec 2016, each with a seat configuration of 12 premium flatbeds and 365 economy seats. The airline, which commenced its long-haul services in 2007, has 66 Airbus A330-900neos on order.

Highlights

25% growth in capacity without new aircraft. Although AirAsia X is not adding any new aircraft in 2017, management is guiding for a 25% increase in ASK. Growth in ASK would be driven by: i. The full-year impact of the capacity put in place in 2016; ii. Higher aircraft utilisation; iii. The redeployment of two wet lease aircraft back to scheduled flights. Although the Mauritius route is to be dropped, the carrier plans to increase frequencies to Tehran, and introduce flights to Wuhan and Hawaii later this year. We believe management may add one more new destination in Asia to deploy its spare capacity.

Capacity to grow faster if AirAsia X restarts flights to Europe. ASK growth could exceed 25% if AirAsia X manages to commence flights to Europe later this year. Launch to European routes from Malaysia, however, depends on availability of appropriate aircraft for lease.

Slower but continuing improvements in revenue yield. While competition is likely to worsen – with the addition of fresh capacity by Malindo Air and Malaysia Airlines – we believe AirAsia X would be able to report improvement in 2017 yield. Management has highlighted that the carrier continues to increase its average air fares by double digits, especially for high demand maturing routes like Japan, Iran and South Korea. The forward booking numbers disclosed by AirAsia X remains encouraging, with higher YoY load factors and average fares through to July. We forecast 8% yield increases in 2017, down from the 14% (excluding fuel surcharge) reported in 2016.

Associate airlines to sustain improvement trend. In 2016, Thai AirAsia X (TAAX) witnessed strong improvements in operations as losses continued to narrow. We expect TAAX to turn profitable in 2017. Meanwhile, Indonesia AirAsia X (IAAX) has suspended operations starting Sep 2016. IAAX is undergoing restructuring, and operations are expected to resume in early 2H17. However, earnings from two aircraft being leased to AirAsia should help sustain earnings and enable the airline to report lower losses in 2017.

Risk remains on the weakening of the MYR. The MYR has depreciated from an average of MYR4.14/USD in 2016 to a spot price of MYR4.47. We forecast the MYR to average MYR4.43, suggesting downside risks if the currency continues to weaken. This is as all of its debt and large portion of its operating cost are denominated in USD.

Company Report Card

Latest results. AirAsia X booked its fourth consecutive quarter of core profits in 4Q16 and its first full-year profit since its IPO. The carrier’s 4Q16 revenue grew 39% YoY to MYR1,170m, while it reported a profit of MYR106m in the same quarter vs a loss of MYR39m in 4Q15.

Balance sheet/cash flow. The long haul budget carrier’s net debt to equity has improved significantly to 0.69x as at end 2016 from 1.80x as at end 2015. We expect it to report a net cash position in 2018. AirAsia X also reported a positive FCF in 2016, offering a FCF yield of 19%.

ROE. The airline’s ROE’s turned positive for the first time as it reported its first full-year profit in 2016 since its IPO. We believe 2016’s ROE of 27% was exceptionally high and estimate the normalised ROE to range between 18-19% over the forecast years.

Dividend. AirAsia X does not pay any dividends.

Management. Mr Benyamin Ismail was appointed as CEO in Sep 2015. Since he took over the reins of the airline, AirAsia X has witnessed a strong turnaround in operations. This was followed by equally strong recovery in earnings. The current management remains prudent and is working closely with AirAsia to optimise its network.

Recommendation

We maintain a BUY rating on AirAsia X and value the carrier based on average target P/E, P/BV and EV/EBITDAR multiples for 2017. Our TP of MYR0.50 implies 2017F P/E of 9x and EV/EBITDA of 5x, which is below the peer average. The Asian (excluding AirAsia X) and global low cost carriers (LCCs) are trading at weighted average multiples of 1FY P/Es 9.8x and 15.3x respectively. Similarly, for EV/EBITDA, the average valuations are 6.8x and 7.3x respectively.

Source: RHB Securities Research - 5 May 2017