This article first appeared in The Edge Financial Daily on October 22, 2019

AirAsia X Bhd
(Oct 21, 17 sen)
Maintain neutral with a lower target price (TP) of 17 sen: In the third quarter of financial year 2019 (3QFY19), AirAsia X Bhd’s (AAX) available seat kilometres (ASK) declined 3% year-on-year (y-o-y), outpacing the 2% y-o-y dip in revenue passenger kilometres. This was due to seasonal capacity management with the total capacity declining 3% y-o-y, more than the number of passengers carried (-2% y-o-y). The destinations involved were Sapporo and Taipei in response to weaker demand during the leanest season of the year for these routes. As such, AAX’s load factor remained reasonable at 81%, one percentage point (ppt) higher than a year ago.

Flight frequencies were increased to Gold Coast, Sydney and Melbourne catering for increased demand following the term holidays in Australia. However, this was insufficient to boost the overall capacity, causing AAX’s average stage length to remain flat on a yearly basis in 3QFY19. Meanwhile, we expect some benefits from AAX’s prudent hedging policy to be realised in 3QFY19 following an average 13% y-o-y drop in the Singapore jet kerosene price during the same quarter, effectively bringing the Singapore jet kerosene price lower by 12% y-o-y on average for the nine months of FY19.

For AAX Thailand, a 32% y-o-y increase in passenger carried in 3QFY19 was underpinned by additional seat capacity and the inauguration of a fifth destination in Japan, Fukuoka in July 2019. Nevertheless, the ASK grew faster at 48% y-o-y due to higher capacity, leading to a decline of 10ppts in load factor to 77% in 3QFY19.

We are imputing lower jet fuel estimates as our Brent crude oil estimate for FY19 has been lowered from US$63 per barrel; previously it was US$70 per barrel. The effect of lower estimated fuel expenses is moderated by a higher greenback versus ringgit of 4.15 from 4.08 previously. In addition, we have factored in a lower growth in capacity amid its ongoing network rationalisation in its key markets. As a result, we are now forecasting a slight loss of RM8.1 million for FY19 and a lower earnings forecast of RM45.6 million for FY20. We expect FY20 to see support from the ancillary segment — Wi-Fi onboard and the Teleport.

Our TP is derived via pegging our FY20 forecast earnings per share of 1.10 sen at a target price-earnings ratio (PER) of 15 times — the average PER of global low-cost carrier peers.

A lower passenger service charge of RM50 for international departures and Asean will provide an additional boost to the current travelling trend. Notwithstanding this, we believe the ongoing capacity deployment will remain a headwind for the rest of FY19. This is in addition to adopting the Malaysian Financial Reporting Standards 16 — a hurdle as most of AAX’s fleet are leased, with gains from a lower interest to be realised beyond the fifth year of the lease term.

However, we expect AAX’s “Teleport.social”, a platform enabling sellers on social media to integrate with Teleport’s logistics infrastructure to realise full-year benefits in FY20. — MIDF Research, Oct 21