KUALA LUMPUR: CIMB Equities Research is maintaining its Reduce recommendation on AirAsia X
on the back of rising jet fuel prices, although its target price has been raised to 31sen from 29 sen on higher load factor assumptions.
It said on Tuesday the target price was based on CY18F price-to-book value of 1.3 times.
CIMB Research said the demand outlook for Malaysia looks strong, with load factors of 83%-84%, while the demand outlook for Thailand is even stronger, with loads in excess of 90%.
While competition in Thailand has heated up, inbound flows of Chinese tourists are robust, while competition in Malaysia turned out to be weaker than expected.
It said Malaysia AirAsia X (MAAX) reported 1Q18 core airline net profit of RM37mil for 1Q18 (excluding estimated leasing profits), up from RM29mil in 1Q17, but representing a margin of only 3%, leaving MAAX particularly exposed to the rising price of jet fuel and weakening ringgit.
“Our core EPS forecasts are significantly below Bloomberg consensus as we factor in an average jet fuel price of US$85/bbl for FY18-20F, in line with the spot price of US$85/bbl at the time of writing. The ringgit has weakened to RM4.05:US$1, below our RM4 assumption,” it said.
“With the rising oil price environment, we believe the AAX group will need to reintroduce a fuel surcharge formula into its ticket price, but is currently waiting for MAS to move first,” it said.
However, typically, not more than 50% of any increases in fuel price can be passed through, so higher spot fuel prices may still hurt airlines’ earnings.
On the revenue front, CIMB Research expects MAAX to benefit from its move in February 2018 to cut its capacity to Australia in favour of North and South Asian routes.
This was a rational move given the losses suffered in Australia, and should improve MAAX’s average yields, all else being equal.
Also, competition in Malaysia has also turned out to be more benign than previously feared, with MAS not expanding to China as much as the research house had thought, and with Malindo failing to take delivery of two A330s for medium-haul deployment.
As for Thai AirAsia X (TAAX), demand for TAAX flights have been phenomenal, with passenger load factor (PLF) at 94% in 1Q18; “we expect PLF to average 91% in FY18F”.
AAX’s 49% share in TAAX’s core net profit accounted for 53% of the group’s core earnings in 1Q18, highlighting the importance of TAAX.
TAAX is doing roaring business to Japan, where it had increased capacity since ICAO lifted the safety red flag on Thailand from August 2017, and is planning to increase its fleet size from six to 10 planes in FY18F to grow its network significantly.
The additional aircraft in FY18F will likely be used to add frequencies on existing routes, fly to new Japanese cities, and potentially open up Taiwan.
In FY19F, CIMB Research expects TAAX to take delivery of another two leased aircraft, and make a stronger push into China, where it currently flies only to Shanghai, and also to explore the viability of flying to Eastern Europe, where there is latent demand for Thai holidays.
From FY20F onwards, TAAX as well as MAAX, will probably begin taking delivery of the group’s A330-900neo orders.
Indonesia AirAsia X (IAAX) is a very low priority for the AAX group, with only breakeven results in 4Q17 and 1Q18.
IAAX made large losses on its Sydney/Melbourne routes from Bali, which were suspended in September 2016.
In May 2017, it launched Bali-KL-Mumbai and Bali-Tokyo Narita; while the latter did well, the former was discontinued in late-April 2018 and replaced with Jakarta-Tokyo Narita flights.
With its weak balance sheet, IAAX is unable to take on more leases to expand, and MAAX is also in no position to support any expansion.
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