Affin Hwang Capital downgrades, cuts forecasts for AirAsia X

PETALING JAYA: Affin Hwang Capital has cut its earnings forecasts for AirAsia X Bhd and downgraded its call to “sell” with a lower target price of 27 sen from 57 sen previously.

In a research report yesterday, it said that it is cautious on AirAsia X due to its disappointing first quarter (Q1) results and cut its earnings forecasts by 32%-66% in FY17-19E on the back of higher jet fuel prices, heightened competition, higher operating expenses and weaker ringgit.

“Despite healthy forward booking trends and double-digit ASK (available seat kilometres) growth this year, we remain cautious on earnings outlook amid weaker currency, higher fuel prices, stiffer competition and increasing operation costs,” it said.

According to data from AirAsia X, forward traffic remains strong, signifying healthy travel demand for the year. Despite recording lower average base fare in Q1 (4% decline year-on-year), the company is expecting higher average base fare between June and August.

It is also expecting a higher load factor this year, compared with 79% in FY16. Affin Hwang Capital expects the company to achieve a load factor of 82% for FY17, supported by its routes with high load factor such as KL-Osaka-Honolulu.

The company aims to grow its ancillary revenue by 30% to RM835.5 million this year from RM642.7 million last year, driven by the various complementary services introduced such as sales of duty-free items, in-flight entertainment and twin seats. It also plans to launch WiFi on board by year-end.

In terms of operating expenses, AirAsia X said the recent increase in wages is crucial to retain talent especially amid a shortage of pilots, and revised the average basic salary for cabin crew from RM1,000 to RM1,200 in Q1.

Overall staff costs increased 40.3% year-on-year to RM105 million in Q1 from RM74.8 million a year ago. Affin Hwang Capital forecasts a 13.6% increase in staff cost this year to RM419.9 million from RM369.6 million a year ago.

Average fuel price was slightly higher at US$66/bbl in Q1’17 compared with US$64/bbl in Q4’16. It has imputed an average fuel price of US$65/bbl this year.

AirAsia X’s Q1 earnings were also affected by the weaker ringgit, as 68% of its operating expenses, including aircraft fuel and aircraft operating lease expenses, is denominated in US dollar. Part of the company’s borrowings is also denominated in US dollar.

“The question remains whether higher ASK growth is enough to offset rising operational expenses. We are of view that earnings will be significantly lower this year due to higher operating expenses. As such, we have changed our assumptions,” said Affin Hwang Capital.

The research house revised its earnings forecasts downwards by 65.6%, 56.4% and 32.5% for 2017E, 2018E and 2019E respectively, underpinned by limited growth in ASK, higher cost and limited upside in revenue per ASK.

“We are expecting ASK to grow by 15% this year and 7% next year from higher utilisation rate of current aircraft. As the two new aircraft are only arriving end of next year, we expect lower ASK growth next year.

“We also think AirAsia X faces pricing pressure as Malaysia Airlines Bhd is set to increase new routes next year. At the same time, AirAsia X will face several headwinds like weak ringgit and higher jet fuel prices,” it said.