Investment Highlights

• We now project a wider net loss of RM1.69bil in FY20F (vs. a net loss of RM1.48bil previously) and a smaller net profit of RM211.6mil in FY21F (from RM219.0mil previously). We tweak our FV down slightly to RM0.41 (vs. RM0.43 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 50% contraction in passengers carried in FY20F (vs. a 35% contraction we assumed previously) to reflect a slowerthan-expected capacity recovery against a backdrop of weak demand for air travel amidst the Covid-19 pandemic. However, we have also factored in lower cost to reflect the airline's aggressive cost-cutting measures, particularly, staff cost, maintenance and overhaul and user charges. Maintain SELL.

• AirAsia disappointed in 1QFY20 with a core net loss of RM502mil vs. our full-year forecast and the full-year estimates of RM1.48bil and RM1.05bil net loss respectively. We believe the variance against our forecast came mainly from lower-than-expected passenger carried. In addition, its performance was also weighed down by a 54% YoY increase in maintenance and overhaul costs due to a higher number of leased aircraft as well as more aircraft undergoing checks as compared to 1QFY19.

• AirAsia's 1QFY20 revenue fell by 15% YoY on the back of a 29% contraction in revenue passenger kilometers (RPK) amidst low air travel demand due to Covid-19 infections. The passengers carried in the quarter were lower by 22% YoY to 9.8mil (vs. 12.5mil previously).

• Moving forward, AirAsia will focus on "deferring variable costs and minimising fixed costs". It is targeting a 50% reduction in cash expenses for FY20, saying that it has achieved at least 30% thus far, with initiatives such as supplier/lender payment deferrals, voluntary pay cuts ranging from 100% to 15%, non-renewal of expired aircraft leases as well as the renegotiation of lease and maintenance charges.

• AirAsia started FY20F with more than 70% of its fuel requirements being hedged at an average price of US$61.41/bbl. It has restructured about 70% of its Brent fuel hedging contracts, with the remaining still in the process of being restructured. In 1QFY20, it booked a RM110mil loss from the settlement of fuel hedges. With the recent rebound in oil prices, we believe there will be reduced further losses from the fuel hedges for the remainder of FY20F.

• AirAsia will also focus on maximising revenues from the reduced capacity as travel restrictions ease. It guided for ASK in FY20 at around 60% of FY19. It hopes to gradually ramp up its capacity to about 75% of pre-Covid 19 levels by the end of the year, and normalise by late FY21F.

• In terms of cash flow management, its operating units have sought commercial loans in their respective countries to shore up liquidity. As it has made known previously, other longer term options under consideration include raising fresh equity as well as forming segment-specific JVs with third parties who could bring in investments.

• We maintain our SELL recommendation on AirAsia. We expect the recovery in the air travel industry to be bumpy given the uncertainties surrounding the reopening of borders and urgent need for airlines to recapitalise their balance sheets on the massive losses they have suffered amidst a collapse in air travel since the pandemic. Zooming in on Asia, we believe the pandemic has thrown a spanner in the works to its strategy to aggressively grow its top line to cushion the impact of the higher cost structure following the recent sale-and-leaseback of its fleet. We are mindful of a potential steep downwards adjustment to AirAsia’s share price in the event of a highly dilutive equity-raising exercise.

Source: AmInvest Research - 7 Jul 2020