AirAsia Group’s (AAGB) 2QFY21 headline net loss narrowed to RM719.6m, compared to a loss of RM1,159.5m in 2Q20. Stripping out one-off items, 1HFY21 core net loss is estimated at RM1266.1m, coming in below our and consensus full year estimates. The discrepancy is primarily due to revenue shortfall as Covid-19 travel restrictions remained. Nevertheless, gradual pick up in domestic operations is expected in 4Q following the easing of restrictions as the country progresses toward the latter stages of the National Recovery Plan. While we lower our FY21/22 estimates to account for current weaknesses, we are now less pessimistic over the Group’s prospects given its (i) liquidity issue being resolved with fundraising on track with RM1bn from its Rights Issue expected to be completed in Dec 21, and RM1bn from Danajamin scheme in progress, (ii) successful lease restructuring and (iii) digital business gaining traction with speedy rollouts of services,strong growth in revenue and monthly active users (MAU). We also change our valuation methodology to sum-of-parts based which sees the target price revised to RM0.86 (RM0.19 previously, based on prospective book value). We upgrade our call to Neutral.

• Group revenue for 2QFY21 was reported at RM370.6m (+160.8% YoY, +15.4% QoQ). Revenue doubled YoY due to low base effect as the Group hibernated its fleet at the start of the Covid-19 pandemic in late 1QFY20. Higher revenue QoQ was driven by better cargo throughput. Revenue from Teleport increased 67% QoQ in 2QFY21 as it strategically grew its cargo network to establish its presence in the market by operating more charter flights and delivery services. Revenue for airline business was 8.4% lower QoQ to RM187.8m. Travel demand remains constrained in Malaysia, Indonesia, and Thailand due to lockdowns and interstate travel restrictions. AirAsia Philippines saw a strong rebound that continued into 2QFY21 with a load factor of 78%, higher than the Group’s overall load factor of 68% in 2QFY21.

• EBITDA loss narrowed to RM207.2m for 2QFY21, down from EBITDA loss of RM683.1m and RM217.2m in 2QFY20 and 1QFY21 respectively. The narrower EBITDA loss was due to cost containment measures and the absence of fuel swap losses as all fuel derivative contracts have been terminated. Average cash burn per month was RM71m, lower YoY but higher QoQ due to lease repayments and lower funding from capital and debt.

• Change in valuation methodology. With the Group seeing some measure of progress being made in its restructuring efforts, we now believe a sum-of-parts based valuation will reflect its intrinsic value better, as compared to the previous book value methodology which assumed the worse. We have ascribed values to the other businesses (super-app, logistics, fintech) based on recent transactions undertaken. While still some way off in fully rehabilitating the airline business, we are now less pessimistic on AAGB’s prospects. We upgrade our call to Neutral. Our valuation is appended in Table 4.

Source: PublicInvest Research - 9 Sept 2021