Investment Highlights

• We now project a wider net loss of RM985.4mil in FY20F (vs. a net loss of RM784.2mil previously) and a smaller net profit of RM258.9mil in FY21F (from RM482.3mil previously). We cut our FV by 47% to RM0.50 (vs. RM0.94 previously) based on 6.5x revised FY21F EPS, at a 50% discount to its global peers (Ryanair and Southwest Airlines) to reflect AirAsia’s relatively smaller size.

• The earnings downgrade is mainly to reflect a 10% contraction in passengers carried in FY20F (vs. a 5% contraction we assumed previously) against a backdrop of weak demand for air travel amidst the Covid-19 outbreak followed by the cancellation of Visit Malaysia Year (VMY) 2020. Maintain SELL.

• The Tourism, Arts and Culture Ministry yesterday cancelled the ongoing VMY2020 campaign in light of the Covid-19 pandemic with immediate effect. The campaign was supposed to bring in 30mil tourists in 2020 (+12% YoY vs. annualised 9M2019 of 26.8mil). We are now projecting a 5% contraction in tourist arrivals (vs. our flattish assumption previously).

• We believe the cancellation of VMY2020 will add pressure to airlines including AirAsia that are already suffering from the weak air travel demand due to the Covid-19 outbreak. AirAsia has already seen a double-digit YoY decline in its passengers since Feb 2020. It is trying to mitigate the situation by not extending expired aircraft leases as well as negotiating for lower lease charges and maintenance fees.

• Also, AirAsia is weighed down by the higher cost structure as a result of sales and leaseback and higher depreciation and finance costs under the new MFRS 16 accounting standard.

• We maintain our SELL recommendation on AirAsia. AirAsia’s key strategy to aggressively grow its top line has been thwarted by the Covid-19 outbreak. Not helping either, is the cancellation of Visit Malaysia Year 2020. This makes it difficult for the group to offset the impact of the higher cost structure following the sale-and-leaseback of its fleet. However, we believe part of the budget previously allocated for VMY2020 could now potentially be relocated as airline aid to help the airline to get through the crisis from the Covid-19 pandemic.

Source: AmInvest Research - 19 Mar 2020