Investment Highlights

• We now project AirAsia's net losses to be at RM2.1bil in FY20F and RM495mil in FY21F, followed by a small profit of RM228mil in FY22F (vs. RM1.69bil losses in FY20F, small profits of RM212mil in FY21F and RM417mil in FY22F projected previously). We tweak our fair value up slightly to RM0.44 (vs. RM0.41 previously) based on 6.5x revised FY22F EPS, at a 50% discount to its global peers (Ryanair and Southwest Airlines) to reflect AirAsia’s relatively smaller size. Maintain SELL.

• AirAsia disappointed in 1HFY20 with a core net loss of RM1.6bil vs. our full-year net loss forecast of RM1.7bil and the full-year consensus net loss estimates of RM1.62bil net loss. We believe the variance against our forecast came mainly from: (1) the lower-than-expected passenger carried; and (2) a 69% YoY increase in depreciation on a larger leased aircraft fleet.

• AirAsia's 1HFY20 revenue fell by 57% YoY on the back of a 64% contraction in revenue passenger kilometres (RPK) amidst low air travel demand due to Covid-19 infections. The passengers carried in the quarter were lower by 60% YoY to 10.1mil (vs. 25.4mil previously) on a 56% YoY reduction in capacity. The revenue was also hurt by refunds of RM60mil in t2Q.

• 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 2QFY20, it booked a RM199mil loss from its realised hedging loss. With the recent rebound in oil prices, we expect smaller losses from the fuel hedges for the remainder of FY20F.

• Our earnings downgrade is mainly to reflect a 70% contraction in passengers carried in FY20F (vs. a 50% contraction we assumed previously) to reflect a slowerthan-expected recovery in the air travel industry, particularly, the cross-border segment

• Meanwhile, AirAsia reiterated its plans to raise RM2bil fresh funds from a combination of equity (placement of new shares to new strategic shareholders, a rights issus, etc.) and debt. It also plans to monetise its digital platforms, which include AirAsia.com, Teleport, BigPay and AirAsia Big Loyalty. Meanwhile, its regional units have sought commercial loans in their respective countries to shore up liquidity.

• Moving forward, AirAsia will focus on making its operations leaner by aggressively cutting its operating expenditure (such as headcount reduction via further digitalisation and lower maintenance and user charges). The sustained low fuel cost will also help tremendously. It intends to rationalise its cost by as much as 50%.

• 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 - 26 Aug 2020