AirAsia Group (AAG) has announced its associate AAJ to cease operations with immediate effect. While AAG has unrecognised losses of c.RM146.8m in AAJ, we do not discount further losses/impairments from the exercise given AAJ still owes a combined c.RM340m to AAG (based on 2019 Annual Report). The impact from Covid-19 has been worse than our initial expectation. Reiterate SELL recommendation with unchanged TP: RM0.46 based on 0.8x of P/B 2020, given the on-going uncertainty of Covid-19. We believe AAG is at risk of further cash calls and potential industry restructuring, in order to keep the group’s operation afloat during this critical period.

NEWSBREAK

AirAsia Group (AAG) has announced that its 66.9% (only 33% voting right) owned associate AirAsia Japan (AAJ) will cease its operations with immediate effect. AAJ’s Board of Directors have made the difficult decision in order to reduce the cash burn of AAJ amid the current highly challenging operations conditions in Japan, being affected by the Covid-19 pandemic since early 2020.

HLIB’s VIEW

A necessary pain. It pains for AAG to announce the ceasing of AAJ, while we believe it’s a necessary measure for the group to survive. AAG has invested US$103m (c.RM420m) over the years into AAJ (has been written down) and AAG has a total of unrecognised losses of c.RM146.8m from AAJ. Based on 2019 Annual Report, AAG has extended a loan to AAJ amounting to c.RM165.4m, which bears 6-8% interest charge and RM173.5m trade receivables from AAJ. Hence, we do not discount further financial impact (i.e. possible impairments) to AAG.

Impact from Covid-19. The impact from Covid-19 has been worse than our initial expectation. All of its regional AOCs are currently facing cash crunch with limitation on the demand for air-travel given the countries’ close border policy and implementation of movement control measures in order to control the spread of Covid-19. Given the group’s depleting cash holdings with a weakening balance sheet, cash call exercise is seemed inevitable. Its other associate AirAsia India is also rumoured to face the same fate of ceasing operations.

Forecast. Unchanged.

Maintain SELL, TP: RM0.46. We reiterate our SELL recommendation on AAG with unchanged TP of RM0.46, based on 0.8x of P/B 2020, given the on-going uncertainty of Covid-19 (governments may extend the lockdowns/ movement controls), 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 - 6 Oct 2020