Narrower losses as expected
AAX reported a core net loss of RM28m in 2Q13, or RM16m profit for 1H13, which, although only 12.5% of our full-year forecast, is broadly in line with expectations since 60% of the profits are typically booked in the 4Q and the 3Q is also usually profitable.
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. We retain our forecasts pending today’s conference call. Re-rating catalysts include rapid expansion at its KUL hub and the opening of two new hubs in Bangkok and Bali.
Highlights of 2Q13
The 2Q is seasonally AAX’s weakest quarter and it should not surprise the investment community that AAX reported a loss. Of note is that the core net loss almost halved from last year as AAX cancelled long-haul loss-making routes to London, Paris and Christchurch. The appreciation of the US$ against the RM between 31 Mar and 30 Jun 2013 caused a foreign exchange translation loss of RM30m, which we have classified as an exceptional. However, the average RM value during 2Q13 actually appreciated 1.5% yoy and, together with the 4.7% fall in average jet fuel price, helped keep fuel costs low.
Australian losses smaller
Both Australia and North Asia were in the red for 2Q13 but Australia shrank its losses 26% yoy as the Sydney route launched in Apr 2012 began to mature. However, North Asian losses rose 32% yoy as the Shanghai route launched in Feb 2013 was likely still loss-making. Furthermore, the 17% yoy depreciation of the Japanese yen during 1H13 probably hurt AAX too.
What to expect for 2H13
The biggest uncertainties are (1) the size of the initial losses for Busan (started Jul) and Adelaide (to start Oct), and (2) the value of the ringgit, which we have assumed to average RM3.25:US$1 for 2H13 but is now trading at RM3.288. Also, Nepal has ordered all airlines to stop using widebodies so AAX may have to give up the profitable route to AirAsia. On the flip side, AAX will be deploying profitable double-daily flights to key Australian cities by year-end.
Publish date: 20/08/13