• AirAsia's 33%-owned associate AirAsia Japan (AAJ) commenced its bankruptcy proceedings yesterday.

• As a result, AirAsia will recognize in its coming FY20 full-year results a loss of US$74.1mil (RM299.3mil) arising from non-recoverability of inter-company loans. It will also incur US$5.2mil (RM20.9mil) in 4QFY20 and 1QFY21 for expenses related to the aircraft deregistration and the mobilization of the three planes from Japan to Malaysia.

• To recap, AAJ announced the cessation of operation in October 2020 due to the highly challenging operating conditions. We were mildly positive on the decision as we believe this can reduce the cash burn of AAJ as the airline operator was struggling to survive amidst the pandemic.

• We maintain our forecasts as we consider the items above being one-off. The loss of 9 sen/share shall erode AirAsia NTA as at 30 Sep 20 by 26% to RM0.26 from RM0.35. We maintain SELL and our fair value of RM0.62 is based on 10x FY22F EPS. At 10x, we value AirAsia at a discount to its global peers, Ryanair and Southwest Airlines (19x–49x forward PE) to reflect AirAsia’s relatively smaller size.

• While the prospects for the air travel industry and airlines have improved significantly following the large-scale rollout of Covid-19 vaccines globally, we are still mindful of the urgent need for airlines, including AirAsia, to recapitalize their balance sheets. For AirAsia, the process has just begun.

Source: AmInvest Research - 25 Feb 2021