• We maintain our SELL recommendation, forecasts and FV of RM0.41 based on 6.5x FY21F EPS, at a 50% discount to its global peers (Ryanair and Southwest Airlines) to reflect AirAsia’s relatively smaller size.

• AirAsia in an announcement today stated that it has triggered the Practice Note 17 (PN17) criteria of the Main Market Listing Requirements of Bursa Malaysia. This follows: (1) the issuance by its external auditor, Messrs Ernst & Young PLT, an unqualified audit opinion with emphasis of matter on material uncertainty relating to a going concern in respect of AirAsia's audited financial statements for the financial year ended 31 Dec 2019; and (2) AirAsia’s shareholders’ equity on a consolidated basis declining to only 37% of its share capital (excluding treasury shares) as at 31 Mar 2020, breaching the 50% requirement.

• However, AirAsia will not be classified as PN17 due to the PN17 relief measures implemented by Bursa from 17 April 2020 till 30 June 2021 in light of the Covid-19 pandemic. AirAsia will only be classified a PN17 company if it continues to trigger any of the PN17 criteria at the end of the 12-month grace period from now.

• As the clock is ticking, AirAsia may not be in the most favourable position when it comes to negotiation with potential new investors. Similarly, given the depressed share price, a rights issue or private placement could be highly dilutive to existing shareholders. As at 31 Mar 2020, AirAsia has a net cash of RM1bil and shareholders’ fund of RM1.1bil vs. total lease liabilities of RM12.2bil.

• We maintain our view that the recovery in the air travel industry will 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 AirAsia, 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 - 8 Jul 2020