AirAsia X Bhd
(Jan 19, RM0.675)
Maintain “hold” with a higher target price (TP) of 70 sen: AirAsia X Bhd (AAX) is doing all in its power to turn around from a tough 2014, and we think it might just succeed.

Loss-making flights will be cut, profitable wet leases will be increased, and aircraft deliveries have been delayed.  Low oil prices add to the likelihood of reported profits in 2015.

We maintain our “hold” call and raise our TP (end of calendar year 2015 or CY15) based on the sector average CY16 price-earnings ratio (PER) of 11 times.

Our previous 78 sen target was an atypical two-year end-CY16 target.

Our core loss forecast for financial year 2014 (FY14) is raised slightly for housekeeping matters, but FY15 to FY16 numbers are upgraded.

AAX has responded with creative solutions to tackle its issues, including reducing its aircraft fleet additions, and by cutting unprofitable flights to Adelaide and Nagoya in January to February 2015.

AAX has also locked in substantial outward wet leases in 2015 in order to remove excess capacity  during the winter lull in Australia.

In addition, after factoring in a much lower jet fuel price of US$90 (RM320.40) per barrel, we are now expecting  AAX to achieve a small core net loss of RM31 million in 2015 (revised from a RM149 million loss),  followed by a RM151 million core net profit in 2016 (revised from a RM116 million profit).

Although the stronger US dollar is negative for AAX’s operating costs and debt burden, its impact is unable to offset the huge savings from lower jet fuel prices, even from a cash perspective.

We are hopeful that new management at AAX’s competitors will seek to control medium-haul seat  capacity and raise fares from later this year.

The Malaysian government is also considering waiving the visa fees for Chinese travellers into Malaysia, which will surely help to restore and grow the volume of inbound Chinese traffic. China routes account for 21% of AAX’s seat capacity.

We previously set a two-year forward TP of 78 sen, based on eight times CY17 PER, because we could not value AAX based on its CY16 earnings, which we had earlier expected to be very small.

After the earnings per share upgrades, we are now reverting to our usual one-year forward TP,  which we set at 70 sen, based on the sector average CY16 PER of 11 times.

We emphasise that although our official TP has been changed, this is not at all a downgrade, only a change in the time horizon.

For illustrative purposes only, our two-year TP would have been 85 sen based on our new earnings forecasts. — CIMB Investment Bank Bhd, Jan 19.

This article first appeared in The Edge Financial Daily, on January 20, 2015.