Investment Highlights

• We downgrade our recommendation to HOLD from TRADING BUY after the huge run-up in share price since our recent upgrade. We now project AirAsia's net losses to be at RM3.1bil in FY20F and RM912mil in FY21F, followed by a small profit of RM220mil in FY22F (vs. RM2.1bil and RM495mil losses in FY20F and FY21F, and a profit of RM228mil in FY22F projected previously). We tweak our fair value down slightly to RM0.66 (vs. RM0.68 previously) based on 10x revised FY22F EPS. At 10x, we value AirAsia at a discount to its global peers, Ryanair (11x forward PE) and Southwest Airlines (15x forward PE) to reflect AirAsia’s relatively smaller size.

• AirAsia disappointed in 9MFY20 with a core net loss of RM2.4bil vs. our full-year net loss forecast of RM2.1bil and the full-year consensus net loss estimates of RM2.4bil. We believe the variance against our forecast came mainly from: (1) lower-than-expected passenger carried; and (2) a higher-than-expected fuel swap losses and other operating expenses.

• AirAsia's 9MFY20 revenue dived by 67% YoY on the back of a 72% 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 69% YoY to 12.0mil (vs. 38.4mil previously) on a 64% YoY reduction in capacity.

• Our earnings downgrade is mainly to reflect a 75% contraction in passengers carried in FY20F (vs. a 70% contraction we assumed previously) amidst a slower-thanexpected recovery in the air travel industry as Malaysia suffers a third wave of Covid-19 outbreak and second CMCO.

• Meanwhile, AirAsia reiterated its plans to raise RM2bil– RM2.5bil fresh funds from a combination of equity (placement of new shares to new strategic shareholders, a rights issus, etc.) and debt. Apart from that, it is also actively exploring other potential monetization opportunities. In 3QFY20, AirAsia has disposed of spare engines to raise liquidity.

• AirAsia will continue to aggressively reduce its operating expenditure (such as maintenance costs reduction via asset optimization, headcount rationalization via further digitalization, salary reduction, etc.). Meanwhile, it is working closely with its lessors, suppliers and creditors for payment deferrals/restructuring of repayment plans, and it has completed its fuel hedges restructuring (recorded RM581mil for fuel swap losses in FY20, and expecting minimal losses in FY21F). As of 3QFY20, AirAsia is on track to rationalize its cost by as much as 50%.

• While the prospects for the air travel industry and airlines have improved significant following successful trials of several vaccine candidates, and their potential availability to the general public within months, we are mindful of the urgent needs for airlines, including AirAsia, to recapitalize their balance sheets on the massive losses they have suffered during the pandemic. There could be a steep downwards adjustment to AirAsia’s share price in the event of a highly dilutive equity-raising exercise.

Source: AmInvest Research - 25 Nov 2020