Challenges and opportunities
AAX hosted its inaugural results briefing yesterday. Although AAX is building its regional market presence, life as a long-haul LCC is never easy. Competition from MAS, the ringgit depreciation, and the hard-to-estimate loss from new route launches make forecasting difficult.
We maintain Outperform with an unchanged SOP-based target price, pegging 11x CY14 P/E for the KUL hub (sector average) and a separate Bali hub valuation of 8x CY14 P/E. Our forecasts stay unchanged. Rerating catalysts include its rapid growth prospects in the region.
AAX’s 2Q13 analyst briefing was hosted by CEO Azran Osman-Rani, CFO Yvonne Abdullah, and Nadia Shahaniza from Investor Relations. Key points as follows: (1) AAX expects to perform sequentially better in 2H13 due to normal seasonal factors, with yields expected to rise hoh. (2) On a yoy basis, Sydney, Osaka and Beijing are seeing 20% yoy increases in RASK, though these are likely to be offset by lower yields from new routes to Shanghai, Busan and Adelaide, and from additional frequencies to Perth, Sydney, Melbourne, Taipei and Chengdu. (3) AAX clarified that Nepal is not closing off its airport to wide-body operators; only that during the six-week period for runway repairs in the future, its aircraft landing weight will have to be reduced by 30 tonnes. Separately, MAS confirmed that it will launch its third daily 283-seat A330 frequency to Melbourne in Nov 2013, coinciding with AAX’s frequency increase to double daily.
What We Think
The Nepal restrictions will force AAX to uplift more expensive fuel from Nepal and limit inbound sales to 300 pax (out of 377 seats), which may lower earnings temporarily. Thankfully, the Nepal route is small. The KL-Melbourne route will see its capacity jump 25% in Nov, which may cause short-term overcapacity and weaken route profitability. We have assumed the ringgit to average RM3.15:US$1 for our entire forecast period, but the spot value is currently RM3.31, exposing our forecasts to downside. Every 5 sen depreciation of the ringgit will reduce our FY13-14core earnings by around 15%.
What You Should Do
Airlines in the throes of significant expansion like AAX go through more speed bumps than the mature airlines. Forecasting for AAX is made more difficult by its small earnings base. Investors will do well to focus on its long-term competitive strengths.