30 January 2020
MIDF Amanah Investment Bank Bhd Research has downgraded AirAsia X Bhd (AAX) to “Trading Sell” at 11 sen with a lower target price (TP) of 11 sen (from 17 sen) and adjusted its earnings estimates, as fears over the ongoing viral outbreak is expected to adversely impact the long haul low cost carrier’s earnings operations and earnings.
The new TP is derived from pegging forecasted FY20 earnings per share (EPS) of 0.93 sen to a target price to earnings ratio (PER) of 12 times, which is a slight discount to the 15 times average PER of global low-cost carrier peers.
The research house said in a note to investors today that it was revising downwards its revenue passenger kilometres (RPK) assumptions, and thus earnings estimates for AAX’s financial year ending Dec 31,2020 (FY20) have been cut by 15% to RM38.7 million, from RM45.6 million previously.
MIDF Research said based on the passenger movement figures during the 2003 SARS outbreak, Malaysia Airports Holdings Bhd (MAHB)’s passenger traffic growth in Malaysia fell by 1.5% year-on-year (y-o-y) to 33.5 million passengers — with total international passengers at Kuala Lumpur International Airport (KLIA) flying to and from China declining by 10.7% y-o-y during the same period.
The research house said 25% to 45% of AAX’s total capacity is concentrated in routes to China — with passengers flying to or from the republic being given the option for a credit account or full refund.
“Assuming a worst-case scenario where all affected passengers opted for a full refund, we estimate that RPK could decline by nearly as much as 20% to 30%. This in turns will reduce AAX’s profit after tax by 27.0%,” MIDF noted.
Consequently, MIDF said it was downgrading AAX to “Trading Sell” from Neutral, as previous viral outbreaks indicate there will be a temporary decline in passenger volume.
Moreover, the current viral outbreak could derail AAX’s plan to launch four flights a week from Kuala Lumpur to Okinawa via Taipei in 1QFY20.
Another hurdle for AAX is the adoption of Malaysian Financial Reporting Standards 16 (MFRS 16). This as the majority of AAX’s fleet is leased, with gains stemming from the lower amount of interest to only be realised beyond the fifth year of the leases.
The research house said notwithstanding the y-o-y improvement in operational statistics in 4QFY19, it is expecting AAX to record a marginal normalised loss of around RM5 million to RM15 million in the said quarter, compared to the RM19.5 million normalised profit
after tax in 4QFY18.
It said AAX had a prudent hedging ratio of 86%, with an average hedge cost of US$73.7 per barrel (pb) in 4QFY19.
“However, jet fuel prices averaged at US$74.2pb in the same period, resulting in minimal hedging benefits.
“In addition, impact from the MFRS16 accounting treatment was not present a year ago. All in, we are still estimating a normalised loss of RM209.1 million for FY19, slightly lesser than FY18, mainly propelled by the 3QFY19 which saw an 76.0% y-o-y reduction in losses,” it said.
The research house added that the lower PER reflects AAX’s exposure to North Asia, which is susceptible to the latest viral outbreak.
As of 10:40am, shares of AAX were trading unchanged at 14 sen, giving it a market capitalisation of RM580.74 million. It saw 2.78 million shares traded.