Investment Highlights

• We maintain our forecasts but cut our FV by 19% to RM1.14 (from RM1.40), based on 6.5x FY21F EPS (from 8x previously) to factor in a higher risk premium for the stock following the latest development. Our target PE for AirAsia is at a 40% discount to its much larger global peers (Ryanair and Southwest Airlines) with an average forward PE of about 11x, partly also to reflect AirAsia’s relatively smaller size.

• AirAsia yesterday announced that with immediate effect, Tan Sri Tony Fernandes (chief executive officer-cumexecutive director) and Datuk Kamarudin Meranun (executive chairman) have relinquished their executive roles in the company for a period of two months or such other period that the company may deem fit, amidst a corruption probe by authorities. For now, the management of the company is vested in the non-executive independent board committee, and retain as advisors to the company during the said period. Tharumalingam Kanagalingam (better known as Bo Lingam) has been appointed as the acting CEO of AirAsia.

• The probe was prompted by the UK court judgment last week in a corruption trial involving aircraft manufacturer Airbus, in which Airbus allegedly bribed two unnamed executives at AirAsia with some US$50 million in sports team sponsorship in exchange for purchasing Airbus aircraft. Airbus has since then paid US$4bil settlement with US, UK and French prosecutors.

• We view the latest development negatively. We find it difficult to argue for a case that “business as usual” will prevail in the absence of the direct involvement of Fernandes and Kamarudin in the management and decision-making process of the company. The duo are the founding members, visionaries and key strategists for the group. The could not have happened at a worse time, amidst the Wuhan conoravirus epidemic that is severely hurting the demand for air travel (which is partially offset by plunging prices of crude oil, and hence jet fuel).

• We maintain our SELL recommendation on AirAsia. The positive outlook for Malaysia’s tourist arrivals (ahead of Visit Malaysia Year 2020) should serve as a tailwind to AirAsia’s key strategy to aggressively grow its top line. However, this is offset by the current Wuhan coronavirus outbreak that is hurting demand for air travel, at least temporarily, coupled with AirAsia’s higher cost structure following the sale-and-leaseback of its fleet.

Source: AmInvest Research - 4 Feb 2020