AirAsia Group (AirAsia) reported a steep 1Q20 headline net loss of RM804m due to RM302m of forex / derivatives losses and RM502m core losses from its underlying businesses. To weather the downturn, management has taken multiple measures to ensure sufficient liquidity in 2020 and targets extensive cost reduction in 2020 & 2021 (up to 50% cost cut in 2020). Management also guided that in addition to securing new loans, equity raising exercise(s) looks imminent. We cut our 2020E earnings and lowered our 12-month price target to RM0.54. Maintain SELL. In view of the difficult market conditions, we expect AirAsia to post losses in the coming quarters, which should in turn weigh down its share price.

Lower Revenue + High Costs = Steep Losses in 1Q20

AirAsia reported a steep 1Q20 headline net loss of RM804m due to RM302m of forex / derivative losses and RM502m core net losses from its underlying businesses – a sharp contrast to the RM102m core net profit reported in 1Q19. The steep 1Q20 core net losses were attributable to: (i) a lower revenue (-22% yoy) due to weak travel demand; (ii) higher staff cost and maintenance & overhaul expenses; (iii) the recognition of RM110m losses on settlement of fuel hedges; and (iv) higher depreciation and interest expenses. The results were below market and our expectations. Taking into consideration the weak 1Q20 results and the challenging business environment in 2Q-3Q20, AirAsia’s 2020E core net loss may come in steeper than the market and our prior forecasts of RM1.05bn and RM1.18bn, respectively. The earnings disappointment was due to lower than expected revenue and high costs.

Capital Management Started in Feb20 to Ensure Sufficient Liquidity

As the Covid-19 pandemic started to unfold and the countries started to impose travel restrictions, AirAsia started its proactive cost management and cash preservation initiatives in Feb20 and hibernated its fleet in Mar20. Management has also: (i) undertaken a headcount rationalisation; (ii) cut the staff and directors’ salaries; (iii) restructured a major portion (70%) of its fuel hedging contracts; (iv) negotiated with the lessors too defer operating lease and maintenance payments; and (v) is seeking loans & exploring other forms of capital raising. Management guided that equity raising (placement and / or right issue) looks imminen

Source: Affin Hwang Research - 7 Jul 2020