This article first appeared in The Edge Financial Daily on November 15, 2019

AirAsia X Bhd
(Nov 14, 16.5 sen)
Downgrade to sell with a lower target price (TP) of 10 sen: AirAsia X Bhd (AAX) released a weak set of results for the third quarter of financial year 2019 (3QFY19), with its core net loss widening to RM142 million (from RM124 million for 2QFY19) due to higher taxation of RM73 million (versus tax credit of RM62 million in 2QFY19). AAX’s 3QFY19 operating loss narrowed sharply to RM15 million, from RM110 million for 2QFY19, due to lower fuel cost (-17% quarter-on-quarter [q-o-q] to RM370 million) and a decline in user charges (-44% q-o-q to RM61 million). Revenue was relatively unchanged q-o-q at RM1.01 billion.

AAX’s cumulative nine months of FY19 (9MFY19) core net loss deepened to RM312 million, from a RM192 million core net loss for 9MFY18, due to lower revenue (-6.4% year-on-year [y-o-y]), higher maintenance and overhaul expenses as well as higher taxation, partly cushioned by lower fuel cost and user charges. The results were below the market’s and our expectations as the street had forecast a net loss of RM182 million for FY19, while we had expected a core net loss of RM220 million. The earnings miss was due to weaker-than-expected revenue and high taxation.

While AAX did a commendable job in controlling operating cost, the revenue came in below our expectations. The group carried 4.6% less passengers in 9MFY19 and the average base fare slipped by 0.2% y-o-y. Also, AAX saw lower aircraft utilisation due to network restructuring. We believe stiff competition, the implementation of the exit tax and AAX’s aggressive expansion plan (and the needs to fill its capacity) have affected AAX’s pricing power, resulting in a negative available seat kilometre spread and the operating loss. The adoption of Malaysian Financial Reporting Standards 16 added another RM177 million in accounting losses to AAX’s 9MFY19 profit and loss.

We cut our FY19-FY21 earnings estimates by RM57 million-RM94 million to account for: i) the weak 3QFY19 results (including the high taxation); and ii) lower revenue forecasts in view of the challenging business outlook. In tandem, we lower our 12-month TP to 10 sen (from 16 sen) based on 2.5 times estimated FY20 book value per share and downgrade AAX to “sell” (from “hold”). Looking ahead, we expect AAX to continue reporting losses for FY19 to FY21 due to stiff competition, subdued passenger growth and a weak ringgit against the US dollar. The weak results should in turn put pressure on its share price.

Key upside risks to our negative view include: i) a sharp decline in oil prices; ii) strengthening of the ringgit; and iii) a better-than-expected operational performance. — Affin Hwang Capital, Nov 14