AirAsia X (AAX) reported 3QFY17 net loss of RM43.3m (3QFY16: net profit of RM11.0m). Excluding forex gain of RM14.7m, deferred tax of RM34.0m and one-off provision for doubtful debt of RM50.2m, its 3QFY17 core net profit was RM9.8m (3QFY16: RM44.2m). Net profit for 9MFY17 of RM61.3m was below our and market expectations at 32% and 40% of full-year estimates respectively. The discrepancy in the 3Q results was mainly due to lower-than-expected revenue per average seat km (RASK) and higher-than-expected aircraft operating lease expenses due to weakening Ringgit. We are lowering our earnings forecast for FY17-19F by an average of 16%, as we adjust our RASK and operating lease expense accordingly. We also adjusted our fleet numbers for FY18F as management decided to lease 3 aircraft for Malaysia (MAAX), 4 for Thailand (TAAX) and 2 for Indonesia (IAAX) operation respectively. Previously, AAX was only expected to receive its new aircraft delivery by the end of FY18. We maintain our Neutral call on AAX, with a lower target price of RM0.38 (previously RM0.41). On a separate note, we are positive on the first-time inclusion of AAX under Shariah-compliant securities list, released by Securities Commission (SC) yesterday, as it provides opportunities for AAX to expand its shareholder base to Islamic funds.

• 3QFY17 revenue. Higher passengers’ carried of 23.2% YoY, exceeding its seat capacity growth of 20.8% YoY, has resulted in an increase in its revenue for 3Q17 by 14.5% YoY to RM1.1bn. This was mainly driven by improved contribution from its scheduled flights (+21.8% YoY) and ancillary revenue (+29.3% YoY). Meanwhile, its charter flights declined by 86.0% YoY. RASK was reported lower in 3Q17 to 12.32sen, compared to 12.70sen in 3Q16. This was mainly due to increased capacity on existing routes and promo fares offered to stimulate new routes. YTD 9MFY17 revenue jumped by 17.8% YoY to RM3.3bn. Management is guiding a strong forward traffic in the next 6 months, with fare pressure forecasted for certain routes as it continues to increase its capacity going forward.

• Higher CASK due to one-off provision on doubtful debt and higher operating expenses owing to weaker Ringgit. AAX recorded a net loss of RM43.3m in 3Q17 compared to a profit of RM11.0m in 3Q16. This was on the back of one-off provision on doubtful debt amounting to RM50.2m. The provision was related to its long-outstanding clients under revenue-guaranteed-model i.e. cargo handler in China and charter for Kathmandu and India routes. However, we understand that management will be taking legal action to recoup back the non-payment. Besides, weakening Ringgit has also increased its USD-related operating expenses, e.g. fuel expenses (+24.7% YoY), maintenance, overhaul and user charge expenses (+30.7% YoY) and aircraft operating lease expenses (+5.6% YoY). These contributed to the increase in cost per ASK (CASK) by 6.1% to 12.80sen (vs 12.06sen in 3Q16). The jump in fuel expenses was mainly due to higher fuel consumption (+13.8% YoY) and average fuel cost to USD65/bbl (vs USD63/bbl in 3Q16). For 9MFY17, AAX recorded a core net profit of RM61.3m, after excluding the one-off provision on doubtful debt recognised during the quarter.

Source: PublicInvest Research - 24 Nov 2017