Reported core LATMI of -RM641.5m for 1QFY21, below HLIB’s FY20 expectation (LATMI -RM1.5bn) and consensus (LATMI -RM1.6bn), affected by stricter MCO implementation in Malaysia. The recent surge in number of cases in the region has raised concern on the fluid Covid-19 situation combined with AAG’s negative equity position and upcoming rights issue exercise. Maintain SELL with a lower TP: RM0.56 (from RM0.70) based on 8x FY23 PE.

Below expectations. AirAsia Group (AAG) continued to disappoint with reported core LATMI of -RM641.5m for 1QFY21, vs HLIB’s FY21 LATMI forecast of -RM1.5bn and consensus -RM1.6n. EIs for the quarter include RM39.7m disposal gain on aircraft engines, -RM179.3m unrealised forex gain, and +RM22.4m derivative gain.

QoQ. Reported LATMI of -RM641.5bn (vs. LATMI -RM543.6m in 4QFY20) was mainly due to implementation of stringent MCOs in Malaysia. The group has ceased its recognition of losses from India (become investment stake level in 4QFY20) and Thailand as the losses in the associate has surpassed AAG’s investment cost.

YoY. Reported LATMI of -RM641.5m (vs. -RM580.3m in 1QFY20), mainly affected by severe drop in air traffic during the quarter as compared to MCO implementation only in late 1QFY20 (i.e. mid-Mar 2020).

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. However, the recent surge cases across the region has further raised concerns on the hopeful early air-travel demand recovery by end 2021, while regional governments remain cautious on the new strains of virus.

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. The group is converting 2 A320s into cargo plane configuration and leasing-in another B737 cargo plane in order to leverage on the strong growth demand for Teleport courier logistic business.

Liquidity. Management has recently raised RM336m through private placement and received RM300m loan from Sabah State government. It is now seeking to raise RM0.8-1bn through a right issue exercise (or combined with borrowings) and another RM1bn from bank borrowings (underwritten by Danajamin), while its operations in Thailand, Philippines and Indonesia are also raising their own funds (new equity and loan). Management clarified severe cost cutting measures has been put in place, resulting to monthly cash burn of only RM87m. Nevertheless, back of envelop calculation indicated the equity fund raising exercise will not be able to address its current negative equity position of -RM1.6bn. Management indicated it may be able to recognise gain/write-backs once the group finalised a new term agreement with the lessors by year end, potentially reversing the negative equity position.

Forecast. Raised core losses to -RM1.6bn (from -RM1.5bn) in FY21 and -RM1bn in FY22 (from profit RM0.6bn) as we assume slower recovery. Introduce FY23 earnings at RM354m.

Maintain SELL, TP: RM0.56. We maintain our SELL recommendation on AAG with lower TP of RM0.56 (from RM0.70), based on 8x PE tagged to FY23 EPS. We remained concern on the current negative equity position and the immediate rights issue exercise, while there is still on-going uncertainty on Covid-19 as well as the “new normal” affecting government’s decision to allow air travel.

Source: Hong Leong Investment Bank Research - 28 May 2021