Affin Hwang Research downgrades AirAsia X to Sell


  • Airlines,Earnings,Analyst Reports
  • Tuesday, 18 Jul 2017

KUALA LUMPUR: Affin Hwang Capital Research has downgraded AIRASIA X to Sell with a target price of 27 sen as it lowers its earnings forecast due to higher jet fuel prices, stiffer competition, rising operating expenses and weaker ringgit.

It said on Tuesday the market had reacted negatively in view of the disappointing 1Q17 results.

Its 12-month target price is revised downward to 27 sen, from 57 sen, pegging the same target price-to-earnings ratio (PER) of eight times to its reduced 2018E EPS forecast. 

“Downside risks: aggressive fare cuts due to stiffer competition, higher crude oil prices and lower passenger travel demand. Upside risks: decline in crude oil prices, ringgit strengthening,” it said.

Affin Hwang Research said AirAsia X remains positive on the group’s earnings performance in 2H17. 

“But we are more cautious due to its disappointing first quarter results,” it said. It cut its earnings forecasts by 32%-66% in FY17-19E. 

The research house pointed out average base fare decreased by 4% on-year (from RM566 in 1Q16 to RM544 in 1Q17) due to the airlines’ effort to increase its capacity on core existing routes in order to grow market share and therefore pressuring yields. 

The airline is also planning to add new routes to China and Korea by the end of this year, following the healthy response to its newly-launched KL-Osaka-Honolulu route. 

“While we expect revenue to grow by 11.6% on-year in 2017E and 9.1% on-year in 2018E, we have lowered our net profit forecasts for 2017E and 2018E by 65.6% and 56.4% respectively due to higher operating expenses. This note marks a transfer of analyst coverage.  

“The airline has raised its employees’ wages. Retaining talent is crucial, especially with the current shortage of pilots. As such, staff cost increased by 40.3% on-year in 1Q17. 

Aircraft fuel expenses and aircraft operating lease expenses were also up 55.4% and 17.7% on-year respectively in 1Q17, resulting in an increase of 29.4% in overall operating expenses in 1Q17. 

“AirAsia X has successfully trimmed 9% off the CASK (cost of available seat-kilometre) ex-fuel cost in 1Q17 by increasing operational efficiency through higher aircraft utilisation. 

“However, this also indicates that there will be less room for CASK improvement in the near future as the current utilisation rate of its aircraft is 16 hours a day,” it said.

CASK is a common unit of measurement used to compare the efficiency of various airlines. It is obtained by dividing the operating costs of an airline by available seat km (ASK). Generally, the lower the CASK, the more profitable and efficient the airline. 
 

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