Target Price: MYR1.65
Another “Red Giant” Flaps Its Wings
We initiate on AirAsia X (AAX) at MYR1.65 per share, premised on an adjusted FY14F EV/EBITDAR multiple of 8.5x. We see the recent IPO as timely for investors to ride on the company’s next leg of growth. We foresee a robust earnings CAGR of 136% from FY12 to FY15, propelled by rising passenger traffic as a result of an expanding fleet, growing yields and new ancillary initiatives. We initiate coverage on AAX with a BUY.
• A straightforward thesis. AAX’s strengths lie in two crucial elements: i) operating at the lowest possible unit cost, and ii) churning up high passenger volume. By maximising an aircraft’s seat inventory by flying longer hours, this long haul low cost carrier (LCC) is able to generate higher seat loads and, ultimately, high topline revenue. The higher aircraft utilisation not only maximises revenue, but also lowers the cost per seat, which in turn helps it minimise overall unit cost as it handles more passengers and traffic. What AAX currently lacks, however, is the scale to emulate the success of sister company, AirAsia (BUY, FV: MYR3.94). Hence, the recent IPO is a timely move in taking this long haul LCC to its next stage of growth, during which it will enlarge its fleet and achieve the scale it needs to propel earnings.
• Using low fares to stimulate traffic. Being the only long haul LCC operator in Malaysia, AAX has not only been able to take market share from the full service carriers, but also successfully stimulated passenger traffic in the routes it operates. The airline has picked Bangkok as its new hub, in tandem with its vision to be a leading long haul LCC.
Together with other carriers in the AirAsia Group, it is working towards building the world’s first multi-hub long haul LCC network.
• Earnings CAGR of 136%. We foresee robust earnings CAGRs of 136% from FY12 to FY15, fuelled by rising passenger traffic as AAX expands its fleet, enhances yield and launches new ancillary initiatives. Moving forward, the company’s rising economies of scale owing to fleet expansion should further pare down unit costs.
• Buy for the growth. We value AAX at MYR1.65 per share, based on 8.5x adjusted FY14 EV/EBITDAR. Its 12x FY14 implied P/E – although at a 1% premium to its LCC peers – is justifiable given its low implied PEG of 0.5x (vs peers’ 0.8x), as reflected by the LCC’s strong 3-year profit CAGR of 136%. We initiate coverage on AAX with a BUY.
Publish date: 05/08/13