We met with the investor relations team of AirAsia X (AAX) to discuss on its turnaround progress for FY16. We expect AAX to have a good start for its 1QFY16 due to seasonally stronger quarter. However, its share price has surged by 67.4% since our upgrade on 28th Jan 2016. Given a limited upside to our revised target price of RM0.36 (based on 1.6x P/BV as we roll-forward to FY17 valuations), we now downgrade AAX to Neutral. Although we anticipate AAX to turnaround by this year attributable to operational efficiency and lower fuel cost, we believe this has already been priced in.

• Yields improving amid better fare environment. Despite lower seats capacity (ASK) in FY15 following its strategy to avoid overcapacity and aggressive fare competition from Malaysia Airlines, AAX recorded a stronger yields in the 2H of the year, which is an indication of a more rational pricing in the industry (Chart 1). Apart from Malaysia Airlines cutting capacity in 3QFY15 onwards, recent move by Malindo Air to KLIA terminal as a full service airline is benefitting AAX and suggesting a yields upside improvement going forward.
• Expanded fleet and new routes. AAX expect to have 4 aircraft delivery in FY16, which two of the aircraft was deferred from last year. Three of the aircraft is expected to be allocated to Malaysia (MAAX), and one will be for Thailand (TAAX). There will be no aircraft delivery expected for FY17, to improve their cash flow position and capacity management, and the new A330 NEOs will only be delivered in the 2HFY18. During the first quarter, AAX launched two new routes: (i) New Delhi, India in Feb 2016, and (ii) Auckland, New Zealand in March 2016. AAX is also looking at adding capacity in China, Tehran and plans to increase frequencies in its Australian market in 2HFY16, taking advantage from the peak season in China and Australia. Meanwhile, the Hawaiian route is expected to be operational in FY17, as the route is still in the midst of acquiring approval. By having these new routes, we anticipate AAX to have some growth in its yields and at the same time improving its connectivity to AirAsia short-haul operations.
• Fuel hedging status. AAX has hedge 100% of its fuel cost for FY16 at an average of USD54/bbl. We believe this strategy will help AAX to effectively control and manage the fuel costs in its attempt to turnaround. Compared to an average fuel cost of USD75/bbl in FY15, we expect AAX to improve its operational profits in FY16 as 32% of its operating expenses is related to aircraft fuel expenses.

Source: PublicInvest Research - 27 Apr 2016