This article first appeared in The Edge Financial Daily, on January 21, 2016.
AirAsia X Bhd
(Jan 20, 19.5 sen)
Maintain buy with an unchanged target price of 26 sen: The management’s optimism is not without basis. AirAsia X Bhd (AAX) chief executive officer (CEO) Benyamin Ismail and team hosted sell-side analysts to a financial year 16 (FY16) outlook briefing at their office at the low-cost carrier terminal recently.
We were also fortunate enough to chance upon Datuk Kamarudin Meranun (group CEO), who explained to us that he and the board of directors feel that AAX would perform fairly better in 2016 with internal stress testing and number-crunching pointing to operating profit. Overall, I left the meeting feeling upbeat on AAX’s prospects.
We believe that fourth quarter ended Dec 31, 2015 (4Q15) results could be in the black at net operating income (NOI) level on the back of 1) higher yields (revenue per unit) due to more rational pricing; 2) improved load factors (utilisation rate) due to seasonality and lower industry capacity; and 3) lower average spot jet kerosene price, which according to our calculations, would average at US$56 (RM244.72) per barrel (bbl; down 39% year-on-year [y-o-y]).
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 US dollar/ringgit of +27% y-o-y. Nonetheless, we believe that AAX’s 4QFY15 results will likely break even at PAT level.
On the issue of potential threats by Malindo, which is expanding its network to medium- to long-haul destinations such as Australia and China, the management believes that AAX remains ahead of the competition.
AAX flies Airbus A330 wide-body aircraft against Malindo’s Boeing 737 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 cross hairs 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/bbl, which is -32% lower than its 2015 hedge at US$88/bbl.
Meanwhile, spot jet kerosene is trading at US$40/bbl, which is -38% lower than the 2015 average of US$65/bbl.
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 -35%, paying US$50/bbl compared with 2015’s US$77/bbl.
Meanwhile, we expect the weaker ringgit to be cushioned by natural hedges as 75% US dollar-denominated cost is hedged against 70% foreign-currency revenue (mainly US dollar and Australian dollar).
Our “buy” call is premised on AAX: 1) benefiting from lower fuel hedges in FY16; 2) improving yields and load factors from industry capacity cuts and less competitive pricing; and 3) compelling valuations, trading at only 7.7 times and four times FY16 and FY17 earnings per share respectively. — MIDF Research, Jan 20
AirAsia X Bhd
(Jan 20, 19.5 sen)
Maintain buy with an unchanged target price of 26 sen: The management’s optimism is not without basis. AirAsia X Bhd (AAX) chief executive officer (CEO) Benyamin Ismail and team hosted sell-side analysts to a financial year 16 (FY16) outlook briefing at their office at the low-cost carrier terminal recently.
We were also fortunate enough to chance upon Datuk Kamarudin Meranun (group CEO), who explained to us that he and the board of directors feel that AAX would perform fairly better in 2016 with internal stress testing and number-crunching pointing to operating profit. Overall, I left the meeting feeling upbeat on AAX’s prospects.
We believe that fourth quarter ended Dec 31, 2015 (4Q15) results could be in the black at net operating income (NOI) level on the back of 1) higher yields (revenue per unit) due to more rational pricing; 2) improved load factors (utilisation rate) due to seasonality and lower industry capacity; and 3) lower average spot jet kerosene price, which according to our calculations, would average at US$56 (RM244.72) per barrel (bbl; down 39% year-on-year [y-o-y]).
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 US dollar/ringgit of +27% y-o-y. Nonetheless, we believe that AAX’s 4QFY15 results will likely break even at PAT level.
On the issue of potential threats by Malindo, which is expanding its network to medium- to long-haul destinations such as Australia and China, the management believes that AAX remains ahead of the competition.
AAX flies Airbus A330 wide-body aircraft against Malindo’s Boeing 737 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 cross hairs 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/bbl, which is -32% lower than its 2015 hedge at US$88/bbl.
Meanwhile, spot jet kerosene is trading at US$40/bbl, which is -38% lower than the 2015 average of US$65/bbl.
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 -35%, paying US$50/bbl compared with 2015’s US$77/bbl.
Meanwhile, we expect the weaker ringgit to be cushioned by natural hedges as 75% US dollar-denominated cost is hedged against 70% foreign-currency revenue (mainly US dollar and Australian dollar).
Our “buy” call is premised on AAX: 1) benefiting from lower fuel hedges in FY16; 2) improving yields and load factors from industry capacity cuts and less competitive pricing; and 3) compelling valuations, trading at only 7.7 times and four times FY16 and FY17 earnings per share respectively. — MIDF Research, Jan 20
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