Reported core LATMI of -RM1.1bn for 4QFY20 and -RM3.7bn for FY20, below HLIB’s FY20 expectation (LATMI -RM3.2bn) and consensus (-RM3.2bn), affected by Covid-19. The vaccination programs have provided some light to AAG’s recovery outlook while its digital ventures have been gaining traction. However, we remain concerned on the fluid Covid-19 situation combined with AAG’s negative equity position and rights issue exercise. Maintain SELL with a higher TP of RM0.90 based on P/E 5x FY22 (from RM0.37 based on P/B 1x FY20).

Below expectations. AirAsia Group (AAG) continued to disappoint with reported core LATMI of -RM1.1bn for 4QFY20, which further dragged FY20 to LATMI -RM3.7bn, vs HLIB’s FY20 LATMI forecast of -RM3.2bn and consensus -RM3.1bn. EIs for the year include -RM579m impairments for ROU (4QFY20), -RM1.3bn impairment on receivables (-RM845m in 4QFY20 and -RM450m in 3QFY20), -RM136m FVA for derivatives, +RM107m unrealised forex gain, +RM229m disposal gain and revaluation of AAI (4QFY20); and +RM394m disposal gain of spare engines (3QFY20).

QoQ. Reported LATMI -RM1.1bn (vs. LATMI -RM0.9bn in 3QFY20) mainly due to implementation of various MCOs in Malaysia. The group has ceased its operation in Japan (resulting loss of -RM20m) and reduced its stake in India (resulting disposal and revaluation gain of RM229m) to investment stake level of 16.3% (from 49.0%).

YoY & YTD. Reported LATMI -RM1.1bn (4QFY20) and -RM3.7bn (FY20) vs. LATMI -RM0.2bn (4QFY19) and -RM0.5bn (FY19), mainly affected by severe capacity cut as well as drop in demand following the spread of Covid-19 since early FY20, cross border lockdown (no international travel allowed) and implementation of domestic movement controls across major geographical operations, coupled with the existing fixed cost structures and hedges.

Vaccination program. The ongoing vaccination programs across Asia have provided some light to AAG’s grim outlook as many anticipated a strong recovery in travel demand in 2022. AAG is banking on the initial stage of recovery to come from domestic air travel demand by end-2021 as vaccination gathers pace across ASEAN countries. However, we do not discount the potential risks of extended lock down/movement control which may further dash hopes of air-travel demand recovery.

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. Among the new services include ride-hailing services, medical tourism package, food delivery, grocery delivery, etc.

Liquidity. Management has recently raised RM336m through private placement and received a RM300m loan from Sabah State government. It is now seeking to raise RM0.8-1bn through right issue exercise and another RM1bn from bank borrowings (underwritten by Danajamin). However, back of envelop calculation indicated the equity fund raising exercise will not be able to address its current negative equity position of -RM1.2bn. We have assumed AAG to raise shares (equity funding) by 20% in 2021.

Forecast. Unchanged. We expect continued huge losses in upcoming 1QFY21.

Maintain SELL, TP: RM0.90. We maintain our SELL recommendation on AAG with higher TP of RM0.90, based on 5x P/E tagged to FY22 EPS (changed from 1x P/B). We remained concern on the current negative equity position and the immediate rights issue exercise, while there is still on-going uncertainty of Covid-19 as well as the “new normal” affecting government’s decision to allow air travel.

Source: Hong Leong Investment Bank Research - 30 Mar 2021