AirAsia X (AAX) reported a 2QFY16 net profit of RM1.0m, compared to a net loss of RM132.9m in 2QFY15. Excluding forex loss and tax incentives, 2QFY16 recorded a core net profit of RM10.5m (2QFY15 core net loss of RM134.3m). For 1HFY16, its core net profit was RM105.7m, which was within our and above consensus’ estimates, accounting for 51.8% and 76.8% of full-year forecasts respectively. As expected, QoQ performance was softer due to the seasonally weaker quarter, whereby travel demand is usually lower in 2Q. We believe the turnaround for AAX is on track, however, we are retaining our Neutral call as we believe this has already been priced-in given the strong rally in its share price. Our target price is maintained at RM0.415 based on 1.6x FY17F P/BV.

Improved in YoY revenue. During the quarter, AAX passengers’ carried increased by 27.3% YoY to 1.03m amid an increase in seat capacity by 13.2% YoY to 1.4m. AAX recorded 35.2% YoY growth for 2QFY16 revenue to RM883.2m, mainly driven by additional flights frequency for Australian routes (i.e. Perth from 11x to 14x weekly and Melbourne from 12x to 14x weekly) and new routes commencement. Revenue per available seat kilometer (RASK) improved by 15.0% YoY to 13.2 sen due to an increase in average passenger fare and ancillary revenue to RM526 (+33.8% YoY) and RM134 (+2.3% YoY) respectively. (Table 1 & 2)

Improved YoY EBITDAR. Despite strong passenger growth and increased number of flights flown, its cost per ASK was flat YoY, on the back of lower fuel cost per barrel to USD59 compared to USD 72 in 2QFY15 (Table 2). AAX reported 2QFY16 EBITDAR of RM261.1m (+108.5% YoY), contributed mainly from its North Asian and Australian routes (i.e. Gold Coast and Sydney). As a result, AAX pre-tax loss narrowed to RM9.2m compared to a pre-tax loss of RM162.4m in 2QFY15. (Table 4)

2HFY16 outlook. Management expects to see average fare momentum to continue in the 2H, partially help by its new ancillary products (e.g. the launching of Premium Lounge by 3Q). Traffic growth from China to Malaysia is expected to remain strong due to the visa requirement waiver implemented by the Malaysian government in March 2016. In addition, AAX will expand its China market by increasing frequency to main cities (Beijing and Shanghai) and introducing new routes. TAAX will be focusing on building passengers’ load and fares. Meanwhile, IAAX is still in the midst of reworking its business plan and will temporarily cease the Australian routes in September onwards, but aiming to restart the service by FY17. Despite that, the US Department of Transportation’s Federal Aviation Administration (FAA) recently announced that Indonesia has complies with International Civil Aviation Organization (ICAO) safety standards and has been granted a Category 1 rating, suggesting a better outlook for Indonesia aviation market going forward.

Source: PublicInvest Research - 24 Aug 2016