AirAsia X - The Right Expansion Plan

AAX’s  3Q13 core net profit came in line our estimates  but likely missed consensus. The economies of scale achieved by expanding its capacity has proved fruitful in lowering unit costs, with the yield contraction less severe  in  the  long haul  space.  Hence, we  keep our  earnings  forecast, and  retain  our  BUY  call  and  MYR1.65  FV  –  premised  on  8.5x  FY14F adjusted EV/EBITDAR. AAX is our airline Top Pick now in Malaysia.

• Results beat expectations. AAX reported 3Q13 net profit of MYR26.4m and cumulative 9M13 net earnings of MYR44.3m. After stripping off IPOrelated expenses  and  unrealised forex losses,  3Q13 and 9M13 core net profit stood at MYR55.8m and MYR113.5m  respectively.  Much of these profits  were  boosted  by  a  higher-than-expected  investment  tax allowance.  Nonetheless,  we  consider  the  numbers  broadly in  line  ours but below consensus. Core  9M13  PBT before tax  allowances and other exceptional items  came in at MYR26.5m vs our  MYR74m  full-year PBT forecast. We think the shortfall could be made in the seasonally stronger 4Q.
• Executing  the  right  strategy.  In  3Q13,  AAX  reported  a  drop  in passenger  air  fare  yields  of  3.3%  y-o-y  and  1.4%  q-o-q,  attributed  to promotional  air  fares  for  its  new  route  offerings.  Although  yields  were weaker  y-o-y,  they  have  shown  a  5.7%  improvement  on a  YTD  basis, following  the  completion  of  its  route  restructuring  exercise  last  year , which  allowed  the  carrier  to  focus  on  high-yielding  routes.  More importantly,  AAX reported improved operational profits as 9M13 EBITDA grew 95% y-o-y. This was achieved on improved  economies of scale, as cost per average seat km (ASK)  fell  14.2% y-o-y in 3Q13  to 6.1  sen per ASK.  AAX’s  new  aircraft  deliveries  too  have  helped  improved  fuel mileage by approximately 3.3% y-o-y, which has led to fuel cost per seat capacity dropping 1.3% YTD despite the slightly higher jet fuel price.
• Outlook  positive,  BUY  maintained.  AAX  is  expected  to  continue  its growth  momentum  into  FY14,  backed  by  its  new  international  hub  in Bangkok,  Thailand;  KLIA2’s  opening  and  the Government’s  initiative in promoting the domestic tourism sector. In the short-term, AAX is now our Top  Pick in the Malaysian  airline space. We still like MAHB (MAHB MK, BUY,  FV:  MYR10.13)  for  the  longer-run.    Our  earnings  forecast  are unchanged. Maintain BUY  and  MYR1.65  FV  –  based on 8.5x adjusted FY14F EV/EBITDAR, in line with the average for Asian low cost carriers.