‘Buy’ for Airasia X

AirAsia X eyes Hawaii after getting FAA nod to fly to US

KUALA LUMPUR: MIDF Research believes AirAsia X Bhd (AAX) fourth quarter ended Dec 31, 2015 results will likely break-even at net profit level.

The research house believed that AAX’s fourth quarter results could be in the black at net operating income (NOI) level on the back of higher yields (revenue per unit) due to more rational pricing; improved load factors (utilisation rate) due to seasonality and lower industry capacity; and lower average spot jet kerosene price which according to our calculations would average at US$56 per barrel  

“While profitable at NOI level, the main deterrent to a positive profit after tax (PAT) remains its interest expenses which would be higher due to the higher average USD/MYR of 27% year-on-year. Nonetheless, we believe that AAX’s fourth quarter 2015 results will likely break-even at PAT level,” MIDF said.

On the issue of potential threats by Malindo which is expanding its network to medium-long haul destinations such as Australia and China, management believes that AAX remained ahead of the competition.

AAX flies A330 wide-body aircraft against Malindo’s B737 narrow-body. The bigger aircraft offers advantages such as higher operating efficiency and comfort to passengers while pricing its fares lower. Moreover, Malindo could find itself in Malaysia Airlines Bhd’s (MAB) crosshairs or vice-versa as Malindo positions itself more as a full service airline.

“AAX will be able to reap the benefits of lower jet fuel prices in 2016 as it has currently hedged 50% of its 2016 requirements at US$60 per barrel which is about 32% lower than its 2015 hedge at US$88 per barrel. Meanwhile, spot jet kerosene is trading at US$40 per bareel which is about 38% lower than the 2015 average of US$65 a barrel.

“On a blended average basis, if jet kerosene prices were to remain at current levels for the remainder of the year, AAX would enjoy fuel cost savings of about 35%, paying US$50 per barrel compared to 2015’s US$77 a barrel. Meanwhile, we expect the weaker Ringgit to be cushioned by natural hedges as 75% USD denominated cost is hedged against 70% foreign currency revenue (mainly USD and AUD),” MIDF said.

MIDF has maintained a “buy” call on AAX with a target price of 26 sen. It said its target price was based on 1.0x justified P/B ratio assuming ROE of 10.3% and cost Of equity of 10%.

“Our ‘buy’ call is premised on AAX benefitting from lower fuel hedges in FY16, improving yields and load factors from industry capacity cuts and less competitive pricing and compelling valuations, trading at only 7.7x and 4.0x FY16 and FY17 EPS respectively,” it added.