AirAsia Group (AAG) announced temporary suspension of the group’s operation as regional governments closed their borders and implemented restricted movement. The impact of Covid-19 is worse than our initial expectations and we may see further extension of suspension. We now forecast loss of RM1.46bn in FY20 (from profit of RM114.3m) and turnaround to profit of RM33.0m in FY21 (from profit of RM435.2m). Cut to SELL (from Hold) recommendation with lower TP: RM0.48 based on 0.6x of P/B 2020, given the on-going uncertainty of Covid-19. We believe AAG is at risk of further capital raising exercise and potential industry restructuring, in order to keep the group’s operation afloat during this critical period.

NEWSBREAK

AirAsia Group (AAG) has announced the temporarily suspension of all its international and domestic flights due to the recent extensive and increasing border restrictions by various countries. AirAsia Malaysia: Suspension from 28 March to 21 April 2020 AirAsia Philippines: Suspension from 20 March to 14 April 2020 AirAsia Thailand: Suspension from 22 March to 25 April 2020 AirAsia Indonesia: Significantly reduce frequency of international and domestic flights AirAsia India: Suspension from 25 March to 15 April 2020 Similarly, AAX has also announced suspension from 28 March to 31 May 2020

HLIB’s VIEW

A necessary pain. With the planned suspension of flights in place, AAG will be able to focus on cost savings given current flights are low in demand, following various countries (where AAG operates) are closing their borders and implementing movement controls as measures to fight the Covid-19 outbreak in their respective countries. It would make sense to suspend its flight operation given the revenue generated (low load factor and low yields) is unlikely to be able to cover the variable running costs.

Impact from Covid-19. The impact from Covid-19 has been worse than our initial expectation. Airlines around the world are facing cash crunch, in the midst of facing bankruptcy, given their depleting cash holdings with high commitments on operational fix costs, and AAG is also facing similar fate despite the group is arguably having lowest operational cost structure with strong balance sheet (net cash position) back in end-2019. World governments will need to provide aids to their respective country based airlines should they still want to maintain air connectivity as well as avoid huge unemployment and negative after-effect from the aviation sector downfall. However, we do expect restructuring and consolidation within aviation industry. Cash call exercise is seems inevitable.

Forecast. We now forecast loss of RM1.46bn in FY20 (from profit of RM114.3m) and turnaround to profit of RM33.0m in FY21 (from profit of RM435.2m).

Downgrade SELL, TP: RM0.48. We downgrade our recommendation to SELL (from Hold) on AAG with lower TP of RM0.48, based on 0.6x of P/B 2020, given the on going uncertainty of Covid-19 (governments may extend the restricted movement control), affecting air travel demand. We believe AAG is at risk of further capital raising exercise (cash calls) and potential industry restructuring, in order to keep the group’s operation afloat during this critical period.

Source: Hong Leong Investment Bank Research - 27 Mar 2020