The outbreak of COVID-19 has substantially affected Asia’s air travel demand (particularly China, Hong Kong and Singapore). AAGB is currently suffering low load factor and yields, while we do not expect meaningful recovery within the next 6 months. The impact on AAX is even more worrying given the weak balance sheet of the airline, and AAGB may need to step in to support AAX. Moreover, the ongoing scandal allegations on both top executives of AAGB have created more uncertainty. Nevertheless, the drop in oil price has provided some cushion to the deteriorating outlook of the group. We maintain HOLD on AAGB with lower TP: RM1.16 (from RM1.42) based on 30% discount to SOP: RM1.66, following the cut in earnings for FY20 (-74.9%) and FY21 (-28.9%).

COVID-19 affecting air travel. The recent outbreak of COVID-19 in China, affecting other 27 countries around the world has raised alerts by WHO (World Health Organisation) on the severity of the new virus. China has locked down several cities and provinces in bids to contain the virus while several countries have scrutinized their border movements. AAGB is being badly affected by a drastic drop in air travel demand as governments have imposed various bans and restrictions on air flights while people are reluctant to travel. We understand that AAGB has been cancelling flights for China sector while suffering low load factor for other sectors. At the moment, global health experts are still analysing the virus and developing the vaccines. We expect AAGB to re-adjust its capacity to more domestic and India sectors (limited number of cases) and postpone the delivery of aircrafts in 2020. We believe any recovery of air travel demand will at earliest, only be realised in 3Q20.

Source: Hong Leong Investment Bank Research - 24 Feb 2020