AAX (5238) : AirAsia X Bhd - Excellent strategic manoeuvres
Target RM0.78 (Stock Rating: HOLD)
AAX reported a large 3Q14 core loss of RM175m, taking the 9M loss to RM394m, higher than our full-year loss estimate. AAX underperformed as competitive intensity did not let up, causing lower-than-expected yields. But the future is bright for AAX because it is executing well-thought out moves to cross over today’s difficulties, including aircraft sales and bond issues to raise cash, but also capacity cuts to Australia and an expansion of its profitable wet-lease business. Together with the lower fuel price, we finally believe the worse is over for AAX and upgrade FY15-16 EPS and raise the recommendation from Reduce to Hold, with a higher target price of RM0.78, using sector average of 8x CY17 P/E (from 1.75x P/BV previously).
Highlights of 3Q14
AAX reported its fourth consecutive quarterly loss, since aggressive capacity expansion into Australia late-2013 triggered a price war. Substantial losses were also reported for North Asia, due to the launch of Nagoya in March and Xi’an in July 2014. Revenue per ASK capacity (RASK) fell yoy for the fifth consecutive quarter. Although RASK rose 6.5% qoq, this could not prevent a sequential increase in core losses as a higher proportion of operating leases increased the level of aircraft maintenance provisions and also leasing costs.
Fund raising options
AAX may issue convertible bonds of around RM330m to RM500m to plug the shortfall of cash reserves, as well as consider the issue of equity as a last resort. AAX has shareholder approval to issue up to 237m shares (10% of its share base), and board approval for an equity issue of at most RM165m. Just this month, AAX sold and leased back (S&LB) two of the eight planes on its balance sheet, and all new Airbus deliveries in 2014 and beyond will likely be S&LB.
Tackling overcapacity
To address the overcapacity issue, AAX will (1) sell two of its eight A330 deliveries in 2015 without leasing back, (2) defer four of the eight deliveries in 2016, and (3) defer three of the eight deliveries in 2017. AAX will also wet-lease more aircraft to other airlines during 2Q/3Q15, and cut back Australian flights during those lull quarters. Hence, ASK capacity growth in 2015-16 will be cut down to just 5% p.a. Together with the beneficial impact of low oil prices, we expect AAX to reduce its FY15 loss materially, and turn a profit in FY16.
Source: CIMB Daybreak - 21 November 2014
Target RM0.78 (Stock Rating: HOLD)
AAX reported a large 3Q14 core loss of RM175m, taking the 9M loss to RM394m, higher than our full-year loss estimate. AAX underperformed as competitive intensity did not let up, causing lower-than-expected yields. But the future is bright for AAX because it is executing well-thought out moves to cross over today’s difficulties, including aircraft sales and bond issues to raise cash, but also capacity cuts to Australia and an expansion of its profitable wet-lease business. Together with the lower fuel price, we finally believe the worse is over for AAX and upgrade FY15-16 EPS and raise the recommendation from Reduce to Hold, with a higher target price of RM0.78, using sector average of 8x CY17 P/E (from 1.75x P/BV previously).
Highlights of 3Q14
AAX reported its fourth consecutive quarterly loss, since aggressive capacity expansion into Australia late-2013 triggered a price war. Substantial losses were also reported for North Asia, due to the launch of Nagoya in March and Xi’an in July 2014. Revenue per ASK capacity (RASK) fell yoy for the fifth consecutive quarter. Although RASK rose 6.5% qoq, this could not prevent a sequential increase in core losses as a higher proportion of operating leases increased the level of aircraft maintenance provisions and also leasing costs.
Fund raising options
AAX may issue convertible bonds of around RM330m to RM500m to plug the shortfall of cash reserves, as well as consider the issue of equity as a last resort. AAX has shareholder approval to issue up to 237m shares (10% of its share base), and board approval for an equity issue of at most RM165m. Just this month, AAX sold and leased back (S&LB) two of the eight planes on its balance sheet, and all new Airbus deliveries in 2014 and beyond will likely be S&LB.
Tackling overcapacity
To address the overcapacity issue, AAX will (1) sell two of its eight A330 deliveries in 2015 without leasing back, (2) defer four of the eight deliveries in 2016, and (3) defer three of the eight deliveries in 2017. AAX will also wet-lease more aircraft to other airlines during 2Q/3Q15, and cut back Australian flights during those lull quarters. Hence, ASK capacity growth in 2015-16 will be cut down to just 5% p.a. Together with the beneficial impact of low oil prices, we expect AAX to reduce its FY15 loss materially, and turn a profit in FY16.
Source: CIMB Daybreak - 21 November 2014
