Reported core LATMI of –RM1.2bn for 2QFY20 and –RM1.7bn for 1HFY20, below HLIB’s FY20 expectation (LATMI –RM1.7bn) and consensus (–RM1.0bn), affected by Covid-19. While the worst may be over, we continue to expect 2HFY20 to remain in red. The gradual opening of domestic market will not be able to cover AAG’s high fixed costs while potentially face stiff competition. Furthermore, AAG will be calling for a capital raising exercise to shore up its capital. Maintain SELL with lower TP of RM0.46 based on 0.8x FY20 P/B.

Below expectations. AirAsia Group (AAG) reported core LATMI –RM1.2bn for 2QFY20 and –RM1.7bn for 1HFY20, vs HLIB’s FY20 LATMI of –RM1.7bn and consensus -RM1.0bn. We deem the result to be below expectation as we expect continued losses in 2HFY20 with only partial recovery of domestic air travel while international travel remain restricted.

QoQ/YoY/YTD. 2QFY20 worsened to LATMI –RM1.2bn (vs. LATMI –RM580.3m in 1QFY20 and –RM222.9m in 2QFY19) and 1HFY20 deteriorated to LATMI –RM1.7bn (vs. LATMI –RM132.2m in 1HFY20), mainly affected by the temporarily suspension of flight services by AirAsia Group during the quarter due to implementation of city lockdown across major geographical operations, coupled with the existing fixed cost structures and hedges.

Allowed domestic air travel. Domestic flights have gradually resumed by end-April with encouraging pick-up rates. By 4Q20, AAG expects domestic flights to recover 70- 75% in Malaysia, full recovery in Thailand, 35% in Indonesia, 60% in Philippines and 75% in India. International flight is only expected to commence earliest in 4QFY20. However, we are generally less optimistic on full relaxation within the region as the outbreak of Covid-19 in India, Indonesia and Philippines are still on a rising trend and seems hard to contain at this juncture. Governments are taking utmost precautionary measures against the risk of a potential 2nd wave within their borders.

Digital ventures. On a more positive note, RedBeat Ventures have been prospering during this difficult period. AirAsia.com has experienced 137% growth in 2Q20. Teleport continued to garner strong demand with new innovation of e-commerce marketplace for order home delivery. BigPay growth driven by increasing remittance volume during the year, and upcoming new business streams i.e. bill payments, lending, wealth management and insurance products.

Liquidity. Management is seeking loans and exploring capital raising exercises amounting to RM2-2.5bn to shore up its cash holding to meet liquidity. We have assumed AAG to raise shares by 20% in 2021. In the meantime, several measures include reduction of salaries/allowances, deferment of payments and lower costs for operating lease and aircraft maintenance, contract renegotiations etc. (see Figure #7). Management is able to achieve cash breakeven (excluding payments to lessors).

Forecast. We now forecast FY20 at LATMI –RM2.6bn (from LATMI -RM1.7bn) and FY21 at LATMI –RM941m (from LATMI –RM480m), and FY22 at PATMI RM422m (from RM405m).

Maintain SELL, TP: RM0.46. We maintain our SELL recommendation on AAG with lower TP of RM0.46 (from RM0.48), based on 0.8x of P/B FY20. The on-going uncertainty of Covid-19 as well as the “new normal” is affecting government’s decision to allow air travel (especially cross border) as well as consumer behaviour. There is a further risk of AAG’s capital raising exercise (cash calls) in order to ensure sufficient liquidity as well as recapitalise its deteriorating capital position.

Source: Hong Leong Investment Bank Research - 26 Aug 2020