Another ‘Red Giant’ flaps its wings - AirAsia X Bhd

by **Cals** Tue 06 Aug 2013, 09:38

Another ‘Red Giant’ flaps its wings
Business & Markets 2013
Written by RHB Research
Tuesday, 06 August 2013 09:11

[b style="line-height: 18px;"]AirAsia X Bhd [/b]
(Aug 5, RM1.23)
Initiate coverage at RM1.20 with buy rating and fair value of RM1.65: AAX’s strength lies 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, higher top line 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 BHD [] (“buy”, fair value: RM3.94). 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.

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 has also successfully stimulated passenger traffic in the routes it operates on.

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.

We foresee robust earnings compound annual growth rate (CAGR) of 136% from 2012 financial year (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.

We value AAX at RM1.65 per share, based on 8.5 times adjusted FY14 enterprise value/earnings before interest, tax, depreciation and amortisation.

Its 12 times FY14 implied price-earnings ratio — although at a 1% premium to its LCC peers — is justifiable given its low implied price-earnings to growth of 0.5 times (versus its peers’ 0.8 times), as reflected by the LCC’s strong three-year profit CAGR of 136%. We initiate coverage on AAX with a “buy”. — RHB Research, Aug 5

[You must be registered and logged in to see this image.]

This article first appeared in The Edge Financial Daily, on August 06, 2013.