LPI CAPITAL

generation routes.

Analysts believe an adjustment to their earnings forecast is necessary as the improvement is already in the works.

“We expect AAX to record losses this year, while we adjust financial year 2019 (FY19) by 34.4% lower.

“This is based on our average fuel price assumption of US$85/barrel (from US$79/ barrel previously) for both fiscal years respectively,” the report stated.

The total price is adjusted lower to 26 sen pegging the FY19 earnings per share to price per earnings of 8.5x. Analysts are expecting AAX to return to profits in FY19 despite the cloudy outlook for FY18.

This could be possible through further cost cutting initiatives, better capacity utilisation of meaningful revenue in new and stable fuel environment.

Although the stock has been downgraded, analysts remain encouraged by AAX’s longterm prospect that is tied to the strategic plan of further reduction in CASK and stronger focus in core markets.

This will be supported by AAX’s gradual shift to modern fleet operation via the purchase of new generation aircraft.

Meanwhile, the nine months in FY18 (9M18) net profit of RM230mil was marginally lower y-o-y, largely due to higher claims and weaker margins.

“Overall, results were within our expectations, accounting for 71% of our FY18E estimate of RM322.2mil,” Affin Hwang stated in their report.

In 3Q18, the group saw a stronger motor net earned premium growth, rising by 4.3% q-o-q (as a result of the strong auto sales during the tax holiday period of June-August 2018) while the miscellaneous segment was up 18.8% q-o-q.

On the other hand, the fire and marine/ aviation/transport (MAT) were down by 2.7% q-o-q and 5.9% q-o-q.

Upwards, there was an improving trend in the group net claims incurred ratio from 47.1% in 1Q18 to 41% in 2Q18 and 37.2%% in 3Q18 (with 9M18 averaging 41.6% vs. 40% in 9M17), largely underpinned by recovery in the motor segment.

The fire segment contributed 42% of 9M18’s net earned premium (NEP), followed by the motor segment at 31% and MAT at 2.1%. Fire segment accounted for about 65% of 9M18 underwriting surplus.

Analysts reiterate Buy and maintain price target at RM18.90, based on a 3.2x 2019E price to book ratio (P/BV) target.

Forecasted earnings in FY18 till FY20 for LPI are maintained by analysts which are underpinned by the following key assumptions that are GWP growth at 2-5%, net earned premium growth at 5-5.6%, net claims ratio at 38-39%.

The downside risks include price competition, spike in claims, higher fraud cases and weaker premium growth.