Investment Highlights

• We now project a net loss of RM784.2mil in FY20F (vs. a net profit of RM299.6mil previously) and a smaller net profit of RM482.3mil in FY21F (from RM587.2mil previously). We cut our FV by 18% to RM0.94 (vs. RM1.14 previously) based on 6.5x revised FY21F EPS, at a 40% discount to its global peers (Ryanair and Southwest Airlines) to reflect AirAsia’s relatively smaller size. The earnings downgrade is mainly to reflect a 5% contraction in passengers carried in FY20F (vs. a 15% growth we assumed previously) against a backdrop of weak demand for air travel amidst the Covid-19 outbreak. Maintain SELL.

• AirAsia disappointed in FY19 with a core net loss of RM436mil, vs. our net profit forecast of RM22.5mil and consensus estimates of RM93.8mil net profit. We believe the variance against our forecast came largely from higher-than-expected losses from associates, particularly Thai AirAsia (RM119mil net loss on the Thai baht’s strength that hurt tourist arrivals) and AirAsia India (RM349mil net loss due to high operating costs, particularly staff and maintenance costs).

• In addition, its performance was also weighed down by: (1) the higher cost structure as a result of the change in its business model from owned aircraft to leased aircraft (apart from high lease expenses, maintenance and overhaul expenses also shot up by 43% YoY); and (2) higher depreciation and finance costs under the new MFRS 16 accounting standard; and (3) RM189mil losses from digital start-ups such as BigPay, AirAsia.com and other Red Beat Venture units.

• FY19 revenue grew 17% YoY on the back of a 9% increase in passengers carried to 51.6mil and a 9% improvement yields in terms of revenue per average seat kilometre (RASK) to 15.53 sen.

• On the other hand, FY19 fuel cost was benign. Its average jet fuel cost fell 6% to US$82/bbl vs. US$87/bbl a year ago. Looking forward, AirAsia has hedged forward up to 70% to 80% of its FY20 jet fuel requirement at US$73.67/bbl (Brent), and around 20% of its FY21 jet fuel requirement at US$59.645/bbl (Brent). This is not quite good news as jet fuel spot price was last traded at US$62.5/bbl.

• For the near term, AirAsia will move its fuel hedging strategy to focus more on hedging crack spread instead, where AirAsia has hedged 18%–21% crack within 1Q2020 to 3Q2020, with an average crack hedged ranging from US$8.42 to US$11.89. There is no major issue with this given the crack was last traded at US$9.24.

• Moving forward, the group is concerned with the tough operating environment ahead amid the Covid-19 outbreak. Beginning 3 Feb 2020, AirAsia has seen passengers declining by ~10% YoY. The group has revised down its load factor forecast for 1H2020 to ~77%. Meanwhile, the airline is actively managing its capacity since early February, coupled with aggressive marketing push. The airline also plans to continue to pursue market share by increasing domestic and intra-Asain flights in place of cancelled international flights. Costwise, AirAsia has stopped extending the expired lease of aircraft, while it tries to negotiate for lower leases and maintenance fees.

• We maintain our SELL recommendation on AirAsia. AirAsia’s key strategy to aggressively grow its top line by riding on the Visit Malaysia Year 2020 has been thwarted by the Covid-19 outbreak. This makes it difficult for the group to to offset the impact of the higher cost structure following the sale-and-leaseback of its fleet.

Source: AmInvest Research - 28 Feb 2020