Fleet Expansion And New Routes Could Extend Reach, But Rising Costs May Impact Profitability

Key Takeaways

• Expanded fleet and routes to new markets aim to increase capacity, enhance revenue, and diversify earnings through broader network and passenger growth.
  
• Cost management and expanded ancillary offerings are projected to improve profitability and bolster non-ticket revenue growth.
  
• Increasing costs, volatile foreign exchange, and a slowdown in key markets may pressure AirAsia X Berhad's financial performance despite ancillary revenue growth.

Catalysts

Provides long haul air transportation services under the AirAsia brand in Malaysia and Thailand.

• The planned full fleet reactivation and addition of more aircraft by the first half of 2025 is expected to expand the network and enhance operational capabilities, potentially boosting revenue from increased capacity and market reach.
  
• Strategic network expansions, including new routes to Central Asia and Africa, are anticipated to stimulate passenger growth and ancillary income, potentially improving earnings and revenue diversification.
  
• Continued focus on cost management, such as the expected decrease in high maintenance expenses after 2025, may lead to improved net margins and overall profitability.
  
• The enhancement of ancillary revenue offerings, alongside a fine-tuned pricing and personalization strategy, is projected to drive further revenue growth, increasing earnings from non-ticket sources.
  
• The anticipated growth in cargo services, notably with the expansion in routes like Nairobi, suggests a sustained revenue stream from freight services, contributing positively to overall revenue.

AirAsia X Berhad Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AirAsia X Berhad's revenue will grow by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.1% today to 5.2% in 3 years time.
• Analysts expect earnings to reach MYR 209.4 million (and earnings per share of MYR 0.47) by about May 2028, down from MYR 229.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.0x on those 2028 earnings, up from 3.1x today. This future PE is greater than the current PE for the MY Airlines industry at 3.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.3%, as per the Simply Wall St company report.

AirAsia X Berhad Future Earnings Per Share Growth

Risks

• The increase in operating expenses, particularly maintenance and overhaul costs, due to fleet reactivation could squeeze net margins despite revenue growth.
  
• The volatility in foreign exchange, which led to losses in the reported quarter, might continue impacting net profit negatively.
  
• The slowdown in demand from China, which accounts for approximately 15% of their routes, could impact overall revenue growth.
  
• The high maintenance checks required in 2025 and the associated costs could increase CapEx, affecting free cash flow and ultimately pressuring earnings.
  
• A large portion of revenue growth is attributed to ancillary income, which may not be sustainable if passenger growth stalls or if competitive pressure on fares increases, impacting overall revenue.

Valuation

• The analysts have a consensus price target of MYR2.58 for AirAsia X Berhad based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MYR4.0 billion, earnings will come to MYR209.4 million, and it would be trading on a PE ratio of 8.0x, assuming you use a discount rate of 13.3%.
• Given the current share price of MYR1.61, the analyst price target of MYR2.58 is 37.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.