Reported core LATMI of -RM880.3m for 3QFY20 and -RM2.6bn for 9MFY20, below HLIB’s FY20 expectation (LATMI -RM2.6bn) and consensus (-RM2.4bn), affected by Covid-19. While the worst may be over, we continue to expect prolonged uphill battle for the opening of borders for air-travel. 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 RM0.37 (from RM0.46) based on 1x FY20 P/B.

Below expectations. AirAsia Group (AAG) reported core LATMI -RM880.3m for 3QFY20 and -RM2.6bn for 9MFY20, vs HLIB’s FY20 LATMI of -RM2.6bn and consensus -RM2.4bn. We deem the result to be below expectation as we expect continued losses in 4QFY20 due to ongoing air travel restrictions.

QoQ. Reported LATMI -RM880.3m (vs. LATMI -RM1.2bn in 2QFY20) due to increase in domestic flight capacity QoQ during the quarter. However, there was an increase of unrecognised losses from associate (mainly TAA and AAI) amounting to RM308.7m in 3QFY20 (vs. RM182.8m in 2QFY20) as the losses in these entities have surpassed AAG’s cost of investments.

YoY & YTD. Reported LATMI -RM880.3m (3QFY20) and -RM2.6bn (9MFY20) vs. LATMI -RM51.4m (3QFY19) and PATMI of RM60.3 (9MFY19), mainly affected by severe capacity cut YoY during the quarter and temporarily suspension of flight services in the earlier part of the year due to implementation of lockdown across major geographical operations, coupled with the existing fixed cost structures and hedges.

Allowed domestic air travel. There are strong signs of recovery for domestic flights in Malaysia, Thailand, Indonesia, Philippines and India. However, international flight continued to face uncertainty as number of Covid-19 cases continued to increase and governments continued to implement close border policies. AAG has decided to cease its Japan operation as well as downsizing its fleets in 2021 in view of the short term difficulties. The recent positive update on vaccine development has nevertheless provided hopes for a recovery to the aviation sector by 2H2021.

Digital ventures. On a more positive note, the group’s digital platform (Teleport, AirAsia.com, BigPay, Santan, BigRewards, Santan) continued to gain traction during this tough period. The segment continued to innovate with new products/services, secure new partners and expand into regional countries, leveraging onto its wide network and database.

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.

Forecast. We now forecast cut FY20 at LATMI -RM3.2bn (from LATMI -RM2.6bn) and FY21 at LATMI -RM1.1bn (from LATMI -RM0.9bn), while increased FY22 at PATMI of RM724m (from RM422m) as we do not expect AAG to recognise losses from associates for the year.

Maintain SELL, TP: RM0.37. We maintain our SELL recommendation on AAG with lower TP of RM0.37 (from RM0.46), based on 1x P/B tagged to FY20 BVPS. The ongoing 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 to recapitalise its deteriorating capital position

Source: Hong Leong Investment Bank Research - 25 Nov 2020