Investment Highlights

• We now project a wider net loss of RM1.48bil in FY20F (vs. a net loss of RM985.4mil previously) and a smaller net profit of RM219.0mil in FY21F (from RM258.9mil previously). We cut our FV by 14% to RM0.43 (vs. RM0.50 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 35% contraction in passengers carried in FY20F (vs. a 10% contraction we assumed previously) against a backdrop of weak demand for air travel amidst the Covid-19 pandemic, aggravated by more severe travel restrictions by various countries that have forced airlines to ground most of their planes. However, we have also factored in lower costs as compared to previous assumptions to reflect the airline's aggressive cost-cutting measures, particularly staff cost, maintenance and overhaul and user charges. Maintain SELL.

• Yesterday, AirAsia announced that it will ground most of its fleet and suspend flights from 28 March onwards, except a small number of flights operating mostly within Indonesia and Thailand. The carrier is one of the latest to join the other airlines around the globe to do so since the Covid-19 outbreak. According to popular real-time flight tracker Flightradar24, commercial flights worldwide have been reduced up to 55% compared to 2019 as at 26 March (Exhibit 1).

• The move was one of the airline's efforts aiming to "defer variable costs and minimise fixed costs". Other efforts include voluntary salary sacrifice by the management and senior employees ranging from 100% to 15%. It will also not extend expired aircraft leases as well as negotiating for lower lease charges and maintenance fees or defer payments.

• As oil prices slumped below US$30/bbl, AirAsia has hedged forward more than 70% of its fuel requirement at US$60/bbl in FY20 (Exhibit 2). Basaed on our back-of-theenvelope calculation, assuming an average Brent crude oil price of US$45/bbl in FY20, AirAsia could post up to RM500mil losses. The company said it is already in talks with banks to restructure the trades. Back in 2008, the company has unwound its fuel hedging contract at a cost of up to RM400mil.

• Meanwhile, for non-airline businesses, some subsidiaries under RedBeat Ventures (i.e. Teleport, OURSHOP, BigPay, Santan) remain operational, even during the movement control order (MCO) period. The company said these will be much more tech-focused as the airline business struggles. For FY20, Teleport targets to achieve a revenue growth of more than 60% to RM800mil (vs. RM481mil achieved in FY19). It will be flying cargo-only on passenger planes to accommodate critical cargo and e-commerce needs while the airline grounds its passengercarrying planes. In FY19, the non-airline ancillary revenue has expanded by 189% YoY, making up around 5% of the total revenue. We are conservatively estimating the non-airline ancillaries’ revenue to contribute up to 9% of the total revenue in FY20 as the airline revenue drops steeply.

• 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.

Source: AmInvest Research - 27 Mar 2020