Investment Highlights

• We now project a narrower net loss forecast of RM3.1bil in FY21F for AirAsia (vs. RM3.5bil net loss projected previously), but keeping our FY22–23F forecasts unchanged. We raise our fair value (FV) up by 35% to RM0.84 based on an 11x FY23F EPS (vs. RM0.62 based on 8x FY23F EPS previously), a PE in line with the average forward PE of its global peers, Ryanair and Southwest Airlines to reflect the improved recovery prospects for the air travel industry in this part of the world now vs. in the past 20 months. Our FV has been adjusted for a 3% premium to reflect a 4-star ESG rating for AirAsia as appraised by us (Exhibit 5). Maintain SELL.

• We consider AirAsia’s 9MFY21 core net loss of RM2.2bil better than our expectation, vs. our earlier full-year net loss forecast of RM3.5bil, but below the full-year consensus estimates of a RM2.6bil net loss. We believe the key variances stem largely from: (i) better-than-expected revenue/ASK (which measures the airline’s total operating revenue generated by each available capacity), thanks to its active capacity management effort; (ii) the better-than-expected revenue contribution from its digital businesses; and (iii) a lower-than-expected operating expenses as a result of the group’s stringent cost containment measures. We have reflected these into our new forecasts.

• AirAsia's 9MFY21 revenues dived by 67% YoY on the back of an 85% contraction in revenue passenger kilometres (RPK) amidst travelling restrictions and low demand due to the pandemic. The passengers carried plunged 83% YoY to 2.1mil vs. 12.0mil previously. Correspondingly, its capacity contracted by 81% YoY. Prior to the pandemic, AirAsia carried 38.4mil passengers in 9MFY19.

• In terms of cost, AirAsia managed to reduce its total operating expenses (opex) by 49% YoY in 9MFY21 (and maintaining it flat QoQ). Its savings in fixed costs are partly contributed by staff cost reduction (via headcount rationalization and voluntary pay cuts) as well as lower marketing and rental expenses.

• AirAsia has completed two batches of lease restructuring in 3QFY21 (which include a total of 17 aircraft leases), and has obtained a RM187.8mil waiver for its past due amounts. It is expecting to complete the full restructuring exercise by the end of FY21, which shall result in lower leasing rates moving forward.

• We believe AirAsia is on track to raise RM2bil–RM2.5bil fresh funds from a combination of new equity and debt. To recap, thus far, AirAsia has shored up its liquidity by: (1) a private placement of 470.2mil new shares or 14% of its preexercise share base at an issue price of RM0.675 (for the first tranche) and RM0.865 (for the second tranche), raising proceeds of about RM336mil in total; (2) effecting the sale and leaseback and sale of two engines; (3) divestment of Fly Leasing, raising proceeds of US$56.8mil (equivalent to RM236.0mil); (4) obtaining approval from Danajamin for 80% guaranteed loan of up to RM500mil; (5) securing an investment of up to US$100mil (equivalent to RM419mil) for BigPay in the form of convertible loan notes from SK Group, a South Korean conglomerate; (6) receiving approval for a foreign loan of up to US$150mil (equivalent to RM629mil).

• Other funding plans that are in progress include: (1) raising an additional RM500mil debt through the Danajamin scheme; (2) raising up to RM1bil via a renounceable rights issue, which it has recently obtained its shareholders’ approval in the EGM on 11 November 2021; (3) raising new capital for its digital businesses.

• To recap, as part of the PN17 relief measures implemented by Bursa Malaysia and the Securities Commission Malaysia, AirAsia was earlier granted an 18-month grace period to be exempted from the PN17 classification, which will due on 7 Jan 2022. The company guided that it is currently engaging the authorities to seek approval for further extension of its grace period.

• While prospects for the air travel industry and airlines have improved significantly following the large-scale rollout of Covid-19 vaccines globally, AirAsia's operations were once again hit by the resurgence in Covid-19 cases both locally and regionally in 9MFY21.

• Depending on how soon the air travel industry could emerge from the pandemic, the biggest short-term headwind for AirAsia remains, which is to address its negative shareholders equity issue to ensure its long-term survival. AirAsia may need to raise more fresh capital, including potentially a debt-to-equity swap for creditors (that is also highly dilutive to its existing shareholders). Already, the RM1bil renounceable rights issue in the pipeline and the free warrants exercise are expected to dilute the existing outstanding share base by more than 50%.

Source: AmInvest Research - 23 Nov 2021