In the turbulent world of aviation, AirAsia X (AAX), the Malaysian low-cost long-haul airline, is making a striking comeback. Known for its focus on medium-haul flights to Southeast Asian destinations, AAX is now emerging as a lucrative investment opportunity.

Weathering the Storm

The aviation industry has been through a challenging phase, plagued by an oversupply of aircraft that escalated the pre-Covid industry downturn. The situation was particularly dire for AAX, which reported losses in the hundreds of millions of Ringgit in 2018 and 2019. Ironically, this period also saw AAX placing an audacious order for 108 Airbus planes, escalating its liabilities into the tens of billions of Ringgit.

In November 2021, AAX initiated a bold and game-changing debt restructuring exercise. Threatening to shut down operations if creditors did not accept their proposed scheme, AAX proposed a significant reduction of its RM34 billion liabilities into just RM200 million. The drastic plan surprisingly worked, transforming AAX into one of the world's financially healthiest airlines overnight.

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Skyrocketing Profits

Earlier this year, AAX reported astonishing Q1 2023 results, with a net profit of RM153.5 million and a core net profit of RM90.2 million, stripping out unrealised gains. Furthermore, the airline reported a positive operating cash flow of RM93.6 million.

Can this profit sustain? The indicators say yes.

The Silver Lining

The Covid-19 pandemic has caused a reshuffling of resources in the aviation industry. Bankruptcies and fleet reductions in Southeast Asia, combined with a boom in flights in the West, have resulted in a shortage of aircraft in Southeast Asia. This unusual situation works favourably for AAX, which predicts that it will only reach its pre-Covid 24 plane levels by 2027.

Moreover, with jet fuel prices dropping significantly by around 20%, the reduced fuel cost directly boosts AAX's bottom line.

Navigating Recovery from PN17 Status

In the complex world of aviation and finance, Capital A Bhd and its sister company AirAsia X Bhd (AAX) are scripting a captivating narrative that may soon attract savvy investors. Both companies, presently in Practice Note 17 (PN17) status due to financial distress brought about by the Covid-19 pandemic, are diligently working on their regularisation plans to restore their financial health and reputations.

Regularisation Plan: A Beacon of Hope

Capital A's mission to exit its PN17 status involves conducting an interim financial review as part of its regularisation plan. This review will help Capital A analyze its current financial position and determine the necessary steps to recover from the ongoing crisis. Once the regularisation plan is finalised, an immediate announcement will be made, signaling potential investors of the company's recovery progress.

A Tale of Two Deadlines

While both Capital A and AAX are in similar situations, their deadlines for submitting their regularisation plans differ. Capital A has an impending deadline on July 7, while AAX has until July 28, thanks to a three-month extension granted on May 9.

Mutual Success through Shared Resources

One of the pivotal aspects of this regularisation plan involves Capital A injecting its aviation business into AAX through a share issuance. This strategic move demonstrates an innovative approach to corporate recovery, intertwining the fortunes of both companies. By leveraging shared resources, the companies aim to re-emerge stronger, not just as individual entities, but as a combined force in the aviation industry.

A Pathway Out of PN17 Status

Both Capital A and AAX fell into PN17 status after incurring losses due to the pandemic, resulting in negative shareholders' equity. However, this isn't the end of the story. The path forward, while challenging, also offers a unique investment opportunity as the companies work towards their recovery.

​A Potential Investment Opportunity

The fact that the shares of both companies are on the rise is a positive signal for prospective investors. As Capital A and AAX journey towards recovery, the potential for growth could translate into substantial returns for those willing to invest now.

Sky-High Valuation

So, how do we gauge the value of AAX?

If we take a leaf from Singapore Airlines' book, which operates low-cost Scoot and is witnessing a significant earnings boom, we can draw some inferences. Singapore Airlines is currently trading at a PE of 6.7x. Applying this to AAX's annualised core EPS of 86.8sen (21.7sen x 4), we arrive at a valuation of RM5.82 for AAX.

Even if we halve the PE to 3x, AAX is valued at RM2.60, providing a staggering upside of 48.75% at the current share price of RM1.75.

To put things into perspective, AAX shares were trading at RM5 in 2017, when it was making only RM50 million in quarterly profits. The current PE ratio of 0.9x suggests a significant undervaluation of AAX shares.

As AirAsia X (AAX) navigates the turbulent skies of financial recovery, its ongoing efforts present a unique opportunity for investors with a keen eye for untapped potential. The company is steadily working its way out of Practice Note 17 (PN17) status, a journey that is far from the end, but is a testament to its resilience and strategic approach. This pathway to recovery not only marks a potential turnaround for AAX, but also suggests a promising horizon for those willing to invest at this pivotal moment.

In an industry marked by unpredictability and high stakes, AAX's ongoing transformation is a remarkable saga of recovery and resurgence. Considering the current undervaluation of AAX shares and the projected growth, the opportunity for investors to reap high returns is evident. The extraordinary success of their debt restructuring, serve as strong indicators of a promising future. Furthermore, with the resurgence of the aviation industry and the realignment of resources creating favorable conditions, the stage is set for a potential breakthrough. As AAX charts its flight path towards brighter horizons, investors might well consider climbing aboard for the journey ahead.

It is my hope that the information provided in this article will be useful for all investors. My intention is simply to share information about a company that has the potential to bring profit to investors. Ultimately, any decision made is up to the individual.

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