This article first appeared in The Edge Financial Daily on October 12, 2018
AirAsia X Bhd
(Oct 11, 24.5 sen)
Downgrade to neutral with a lower target price (TP) of 26 sen: Losses could widen in the third quarter of financial year 2018 (3QFY18). Recall that AirAsia X Bhd’s (AAX) net profit slumped into the red in the first half of FY18, as a result of elevated fuel cost. On average, fuel price came in +33.7% year-on-year higher from US$54.6 per barrel since December 2017. Largely, this was attributable to the anticipated US sanctions on Iranian oil exports, shale bottlenecks and Venezuelan turmoil. As such, we are expecting the price to remain volatile. This will elevate the downside risk of fuel cost especially for airlines, as it accounts for a large percentage of operating expenditure.
Despite AAX’s attempt to further squeeze out savings from ex-fuel costs, the fuel price increase remains a major encumbrance to earnings. We expect it to remain in the near term as the move to increase yield continues to be challenging. Notably, we have to make allowance for the introduction of new routes, whereby fare prices are typically given heavy discounts. Although this is positive to enhancing presence and connectivity, we have to be cognisant of the short-term pressure it has on seat sales revenue.
The current environment serves as a proving ground for AAX to firm up its long-haul low-cost business model. Its ability to sustain earnings in the long run would be largely driven by the continuous improvement in cost structures and the generation of meaningful revenue in new routes. While these are already in the works, we believe an adjustment to our earnings forecasts is necessary. Note that fuel consumption accounted for the largest portion of the group’s overall expenses at 35% to 38%. From our sensitivity analysis, we estimate that every +1% rise in fuel price will impact net operating profit by -12%.
Accordingly, we adjusted our earnings forecasts lower to take into account the elevated fuel price for FY18 and FY19. This is based on our average fuel price assumption of US$85 (RM363.60) per barrel (from US$79 per barrel previously) for both fiscal years respectively. We expect AAX to record losses this year, while we adjust FY19 by -34.4% lower.
Based on the changes made, our TP is adjusted lower to 26 sen. This is pegging its FY19 earnings per share at price-earnings ratio of 8.5 times. Despite the cloudy outlook for the rest of FY18, we are expecting AAX to return to profit in FY19. This could be possible through further cost cutting initiatives, better capacity utilisation and stable fuel environment. Although we are downgrading the stock due to short-term headwinds, we remain encouraged by AAX’s long-term prospects that are tied to the strategic plan of further reduction in cost per available seat kilometre and a stronger focus in core markets. This will be supported by AAX’s gradual shift to modern fleet operation via the purchase of new-generation aircraft. — MIDF Research, Oct 11