Analyst report


  • Business
  • Friday, 12 Oct 2018

 

AirAsia X Bhd

By MIDF Research

Neutral (downgrade)

Target price: 26 sen (from 40 sen)

AIRASIA X Bhd’s (AAX) net profit slumped into the red in the first half of the financial year 2018 (1H18) as a result of elevated fuel cost. Fuel price came in, on average, 33.7% year-on-year (y-o-y) higher from US$54.6bil since December 2017. This was largely attributed to the anticipated US sanctions on Iranian oil exports, shale bottlenecks and Venezuelan turmoil.

“As such, we are expecting the price to remain volatile,” the research house said.

Fuel consumption accounted for the largest portion of the group’s overall expenses at 35%-38%.

AAX’s cost structure remains a challenge due to the fact that despite its attempt to further squeeze out savings from ex-fuel costs, fuel price increase remains a major encumbrance to earnings.

Analysts expect the group to remain under pressure in the near term as the move to increase yield continues to be challenging.

New routes are also given allowance by the research house, as fare prices are typically given heavy discounts.

“Although this is positive to enhance presence and connectivity, we have to be cognizant of the short-term pressure it has on seat sales revenue,” analysts said.

The current environment serves as a pro­ving ground for AAX to firm up its long-haul low-cost business model.

Its ability to sustain earnings in the long run would be largely driven by the continuous improvement in cost structures and the generation of meaningful revenue in new routes.

Analysts believe an adjustment to their earnings forecast is necessary as the improvement is already in the works.

“We expect AAX to record losses this year, while we adjust financial year 2019 (FY19) by 34.4% lower.

“This is based on our average fuel price assumption of US$85/barrel (from US$79/barrel previously) for both fiscal years respectively,” the report stated.

The total price is adjusted lower to 26 sen pegging the FY19 earnings per share to price per earnings of 8.5x. Analysts are expecting AAX to return to profits in FY19 despite the cloudy outlook for FY18.

This could be possible through further cost cutting initiatives, better capacity utilisation and stable fuel environment.

Although the stock has been downgraded, analysts remain encouraged by AAX’s long-term prospect that is tied to the strategic plan of further reduction in CASK and stronger focus in core markets.

This will be supported by AAX’s gradual shift to modern fleet operation via the purchase of new generation aircraft.

 

 

LPI CAPITAL

By Affin Hwang

Buy (maintained)

Target price: RM18.90

LPI Capital staged a rebound in the third quarter of the financial year 2018 (3Q18) net profit, rising by almost 40% quarter-on-quarter (q-o-q) though on a year-on-year (y-o-y) was flat.

Meanwhile, the nine months in FY18 (9M18) net profit of RM230mil was marginally lower y-o-y, largely due to higher claims and weaker margins.

“Overall, results were within our expectations, accounting for 71% of our FY18E estimate of RM322.2mil,” Affin Hwang stated in their report.

In 3Q18, the group saw a stronger motor net earned premium growth, rising by 4.3% q-o-q (as a result of the strong auto sales during the tax holiday period of June-August 2018) while the miscellaneous segment was up 18.8% q-o-q.

On the other hand, the fire and marine/aviation/transport (MAT) were down by 2.7% q-o-q and 5.9% q-o-q.

Upwards, there was an improving trend in the group net claims incurred ratio from 47.1% in 1Q18 to 41% in 2Q18 and 37.2%% in 3Q18 (with 9M18 averaging 41.6% vs. 40% in 9M17), largely underpinned by recovery in the motor segment.

The fire segment contributed 42% of 9M18’s net earned premium (NEP), followed by the motor segment at 31% and MAT at 2.1%. Fire segment accounted for about 65% of 9M18 underwriting surplus.

Analysts reiterate Buy and maintain price target at RM18.90, based on a 3.2x 2019E price to book ratio (P/BV) target.

Forecasted earnings in FY18 till FY20 for LPI are maintained by analysts which are underpinned by the following key assumptions that are GWP growth at 2-5%, net earned premium growth at 5-5.6%, net claims ratio at 38-39%.

The downside risks include price competition, spike in claims, higher fraud cases and weaker premium growth.


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