MAS is expanding capacity heavily throughout the Asia Pacific region after withdrawing its long-haul flights last year. This is where AAX plies its trade and MAS's unwelcome capacity injections have hit yields. Separately, its Thai AAX venture may produce near-term losses.
We cut 2013-15 forecasts by 26-36% after reducing our yield assumptions. Margins are currently very thin, so the carrier is especially sensitive to small changes in yield and exchange rate assumptions. We downgrade AAX from Outperform to Neutral. Our target price is now based on 11x CY15 P/E (sector average) vs. SOP previously that included the valuation of its future Bali hub which we have now removed.
Competition gets intense...
The latest August operating statistics by MAS suggest continued heavy discounting in the market, and is a huge cause for concern for AAX. For international routes, MAS‟s RPK expanded by a staggering 40.5% yoy in August 2013, while ASK rose 20.4%. But the 12.4%-pt rise in PLF to an all-time high of 86.2% suggests heavy discounting. AAX will have to respond to MAS's fare discounts by lowering its fares as well. We did not expect MAS to compete so aggressively on price. AAX is facing constraints on its growth due to the very congested LCCT terminal, and this will persist until it moves to the new KLIA sometime in 2014.
...even down south
The Australian government recently increased the rights of Malaysian carriers to fly into four key cities by 40%. These cities include Sydney, Melbourne, Perth and Brisbane. As a result, AAX will increase frequencies to two flights daily on Sydney, Melbourne and Perth by end-2013, and MAS has also raised its capacity. Capacity between Malaysia and Australia as a whole will rise 37.9% between January and December 2013. These are major capacity increases that could take time for the market to absorb, and yields to Australia may soften more than expected.
Thai AAX to start by 1Q14
Thai AAX is expected to start flying by 1Q14. We have assumed that Thai AAX will incur RM15m in losses during 2014 for each city it flies to, leading to a total start-up loss of RM45m next year. AAX owns 49% of Thai AAX. Our previous target price incorporated a value of 13 sen for the proposed Denpasar, Bali hub. We have removed this from our end-2014 target price as investors are unlikely to look so far ahead.
Publish date: 26/09/13