Following AirAsia X‟s (AAX) results release last week, we had an analyst briefing teleconference and an update call with AAX management to get more details on its outlook. Despite seasonal weakness in its 2Q13 results, we are still positive on AAX‟s long-term potential, in particular opening of new hubs in Thailand and Indonesia as well as increasing frequencies to bolster its market leadership position in its existing routes. We have an Outperform call on AAX with a 12-month target price of RM1.43 (previously RM1.50) after revising our foreign exchange rate and costs assumptions.

Seasonally weak second quarter. AAX management indicated that second quarter is seasonally a weak quarter. Nevertheless, its 2Q13 revenue grew 21.5% y-o-y to RM491.1m, driven by increased available seat kilometers (ASK) (+13.5% y-o-y to 4.27m) with addition of two new planes. Management highlighted its 2Q13 ancillary revenue per customer grew 9.9% y-o-y to RM142 mainly due to higher take-up rates for its Fly-Thru connecting transfer services. In 2Q13, AAX‟s EBITDAR margin improved to 12.5% (2Q12: 6.5%) and its operating loss margin narrowed 7.0%-pts to 2.4%, lifted by discontinued loss-making routes to Europe, India and New Zealand.

Expansion plans on track. AAX‟s growth hinges on its expansion plans such as: (i) increasing flight frequencies in its existing routes; (ii) new routes in its key markets such as Australia, China and Japan; and (iii) new operating hubs in Bangkok and Bali. To support its expansion, AAX will take delivery of 7, 7 and 5 new planes in 2013, 2014 and 2015 respectively. Management mentioned that two-thirds and one-third of new capacity in 2013 will be used for increasing flight frequencies and new routes (Shanghai, Busan and Adelaide) respectively. We believe AAX‟s expansion will be critical to strengthen its key competitive advantages and market leadership in the low-cost, long-haul segment.

Concerns on forex fluctuation and fuel costs. Management highlighted 50% of AAx‟s forex exposure on long-term borrowings are hedged. Its recent borrowings on 3 new planes are fixed-rate and ringgit-denominated. Management is looking into reducing its USD exposure and may borrow in Japanese yen (JPY) will be hedged by AAX‟s JPY revenue. For its fuel costs, AAX has a policy of hedging 50% of its forward bookings as it enters each quarter.

Outperform call with target price of RM1.43. We have an Outperform call on AAX with a 12-month target price of RM1.43 based on DCF valuation (previously fair value of RM1.50 in IPO note) after revising our foreign exchange rate and operating cost assumptions. Although AAX‟s near-term performance may face headwinds from weakening ringgit and start-up costs associated with fleet and route expansion, we like AAX for its long-term growth prospects. In particular, we believe AAX‟s exceptionally low operating cost base and market leadership in its Australian & North Asian routes will enable it to compete effectively in the highly-competitive long-haul airline business.

Source: PublicInvest Research - 27 Aug 2013