Risks in AirAsia X's growth plan, some new routes may not be profitable
BY CHOONG EN HAN
PETALING JAYA: AirAsia X Bhd’s (AAX) aggressive fleet growth plan of seven aircraft each in 2013 and 2014 may pose some risks to the low-cost long-haul airline, according to Maybank Investment Bank Bhd (Maybank IB).
It expressed its concerns that the airline’s high-capacity growth with the taking delivery of 14 aircraft could hinder revenue growth and consume capital.
“There is a risk that some of the new greenfield routes will underperform in their initial start-up period, or worse, don’t work at all. Currently, greenfield routes make up 23% of AAX’s total capacity,” it said in a report released yesterday.
It said the plan represented significant year-on-year capacity growth of 29.8% and 58.4% respectively by its estimate, the highest number of new seats to be deployed in a given year in its history, and implied 15 new flights to be launched per year.
“There are various execution risks, which are low load factor during the initial launch period, inability to secure international route landing rights and impaired aircraft utilisation rates. There is an inherent risk that some routes may not work.
“The ability to recognise underperforming routes and terminate them is an important attribute for a successful airline. AAX has been exceptionally good to implement changes swiftly,” it said.
However, it said the key attraction was also its growth potential, given its aggressive fleet growth plans coupled with a wide geographical catchment area.
“The low-cost long-haul segment is relatively more defensive compared with full service carriers, as more people switch to budget travel during an economic downturn to save cost,” it said.
It has a “buy” call with a target price of RM1.30 on AAX, based on 15 times financial year 2014 price to earnings ratio, and it said this was on the upper band of the typical aviation multiple of between 8 times and 15 times to factor in AAX’s strong growth potential.
Out of 12 research houses tracked by Bloomberg, seven had a “buy” call on AAX, with a consensus target price of RM1.32.
AAX ended at RM1.08 yesterday, 13.6% lower than its initial public offering (IPO) price of RM1.25. Its stock price slumped when Maybank IB ceased its stabilising action after buying a total of 65.53 million shares post-listing of the company on Bursa Malaysia.
It is of the opinion that the valuation is fair given AAX’s immense growth prospects with projected three-year forward earnings compounded annual growth rate of 98.5% and its market leadership status.
Consensus estimate its net profit to grow to RM670.1mil in 2015, from RM197.4mil in 2013. Revenue is projected to reach RM5.48bil in 2015 from RM2.65bil in 2013.
Its current net gearing ratio is also expected to drop to 2.6 times by end-2013 from 7.0 times due to the proceeds of the IPO, and this would gradually decline to 2.0 times by 2015.
“These are supported by profits, strong cashflow from operations and three expiring aircraft leases, two in 2015 and one in 2016,” it said.
Publish date: 11/09/13