AirAsia X Bhd
(Mar 30, RM0.46)
Upgrade to buy with a lower target price of 49 sen: We are positive on the turnaround plan for AAX while the favourable operating environment would improve the odds of it being successful.

Thus, we upgrade AAX to “buy” from “neutral” with a revised ex-rights target price of 49 sen (from 57 sen) using the justified price-to-book method.

Our target price represents a 19.5% upside over the adjusted ex-rights price of 41 sen based on last Friday’s closing.

Following a slew of changes to the top management and an outline of the turnaround plans, we believe AAX’s share price has found its bottom.

This is premised on: (i) the holistic turnaround plan which addresses weaknesses in the previous business model; and (ii) lower jet fuel price. We also believe the operating environment has become less hostile with a possible end to Malaysian Airline System Bhd’s irrational competition.

In terms of bad years for the aviation industry in Malaysia, none could be any worse than the financial year ended December (FY14).

The three tragic aviation incidents and a kidnapping on a popular island destination dented travel demand. To exacerbate matters airlines had just taken delivery of new fleets, boosting capacity by double digits. As a result, ticket prices came down in order for airlines to fill excess capacity, providing a triple whammy to industry players.

While FY15 will by no means be a walk in the park, we believe the worst is over. One of AAX’s major advantages was to be able to constitute changes depending on the market situation to ride out challenging times.

From the tone of management when commenting on the recent reshuffle, we believe there could be some resistance from the previous management to implement changes such as cost-cutting measures (for example, reducing cabin crew from nine to eight members and the axing of routes). With the newly-installed management in place and the founders leading the show, we see fewer impediments to necessary changes.

Management obtained shareholders’ approval for the RM390 million rights issuance to ease the cash flow position of the company. Despite some grouses from shareholders, none of the attending shareholders at the extraordinary general meeting opposed the resolutions that were tabled.

Shareholders were overall still confident in the management, board of directors and prospects of the company. — MIDF Research, March 30

This article first appeared in The Edge Financial Daily, on March 31, 2015.