Reported 1QFY20 core LATMI of -RM580.3m, below HLIB’s expectation (LATMI -RM1.5bn) and consensus (-RM1.0bn), affected by Covid-19. We expect worsening 2QFY20, while 2HFY20 is unlikely to turnaround. The gradual opening of domestic market and international flights within ASEAN/China would be selective and potentially face stiff competitions. Furthermore, there is a high chance of AAG calling for capital raising exercise. Maintain SELL with unchanged TP of RM0.48 based on 0.6x FY20 P/B.

Below expectations. AirAsia Group (AAG) reported core LATMI -RM580.3m in 1QFY20, vs HLIB’s FY20 LATMI of -RM1.5bn and consensus -RM1.0bn. We deem the result to be below expectation as we expect significantly worsened 2QFY20 while 2HFY20 is unlikely to turnaround either.

QoQ/YoY. 1QFY20 worsened to LATMI -RM580.3m (vs. LATMI -RM249.5m in 4QFY19 and PATMI RM90.2m in 1QFY19), mainly affected by lower air travel demand following outbreak of Covid-19 and implementation of city lockdown across major geographical operations of AAG since mid-1QFY20 (started in China), as well as higher cost structures following completion of sales and leaseback of aircrafts, resulting higher net impact of MFRS 16 and provision of aircraft maintenance.

Affected travel demand. The outbreak of Covid-19 has affected the overall travel demand and yield of the aviation sector, including AAG. AAG suspended its flights since end-March and only gradually resumed its domestic flights by end-April. Management expects to resume international flights for China and ASEAN countries within 3Q2020. However, we are generally less optimistic on full relaxation within the region as the outbreak of Covid-19 in Indonesia and Philippines are still on a rising trend and hard to control at this juncture. Governments are taking utmost precautionary measures against the risk of a potential 2nd wave within their borders.

Actions. Management is strategizing in limiting the downside impact with proactive capacity management to match demand. AAG is also actively implementing cost cutting measures and actively working with stakeholders (airports, governments, aircraft leasing co, maintenance service providers) for better incentives and rebates with stimulus plan in place. Management aims to cut cash expenses aggressively by 50% in 2020 (see Figure #7). On a more positive note, the group’s digital ventures under RedBeat Ventures have been prospering during this difficult period (immaterial contribution at this juncture).

Liquidity. Management will ensure sufficient liquidity to ride through the impact of Covid-19 in FY20. Several measures include reduction of salaries/allowances, deferment of payments for operating lease and aircraft maintenance, contract renegotiations etc. Management is also seeking loans and exploring capital raising exercises to shore up its cash holding to meet liquidity.

Forecast. We now forecast FY20 at LATMI -RM1.7bn (from LATMI -RM1.5bn) and FY21 at LATMI -RM480m (from PATMI RM33m), and introduce FY22 with a turnaround to PATMI RM405m.

Maintain SELL, TP: RM0.48. We maintain our SELL recommendation on AAG with unchanged TP of RM0.48, based on 0.6x of P/B FY20. The on-going uncertainty of Covid-19 as well as the “new normal” is affecting consumer behaviour in air travel demand. The gradual opening of domestic and international routes is expected to introduce stiff competitions among airlines, as they compete for the now smaller pie market in order to maximise their fleet utilization. There is a further risk of AAG’s further capital raising exercise (cash calls) in order to ensure sufficient liquidity.

Source: Hong Leong Investment Bank Research - 7 Jul 2020