Following allegations found in high court documents related to Airbus’ USD4b settlement with prosecutors of US, UK and France, that it made questionable payments linked to sponsorship of a sports team jointly owned by senior AirAsia executives to secure orders for aircraft, AirAsia responded in its website vigorously denying allegations of any wrongdoing. Besides corruption allegations, also weighing down AirAsia currently is the negative impact that the worsening Wuhan virus outbreak has on air travel. For these reasons, our TP is cut from RM1.70 to RM1.33 based on 8x FY20E EPS. Reiterate MP.

Accusations of wrongdoing vehemently denied. While not denying the sponsorship by Airbus, AirAsia stated clearly that the purchase decisions made were never premised on such sponsorships. In fact, AirAsia even went so far as saying that “the involvement of Airbus in the sponsorship of the sports team was a well-known and widely-publicised matter bringing branding and other benefits to Airbus.” According to the Straits Times, the UK SFO (Serious Fraud Office) allegations concerned a 2012 USD50m sponsorship between Caterham Formula 1 racing team (founded by Tony Fernandes) and Airbus’s then parent, EADS. AirAsia defended its own sponsorship of Caterham F1 as properly conducted via due internal assessment and approvals before being considered and approved by the Board. AirAsia further went on to state that aircraft purchase agreements were a collective Board’s decision arrived at after careful evaluation and deliberation, taking into account technical specifications, flight performance and operating economics besides superior reliability and attractive pricing.

Put in the context above, although it appears to us that AirAsia may have a credible and defensible case, it will likely have to bear the misfortune of a sell-off in its shares at today’s market open over concerns of whether MACC’s investigation on the matter will lead to legal action being taken against it. For if so, not only at risk is the potential financial damage but perhaps more importantly, its brand value and hitherto good standing – in particular that of Tony Fernandez himself - with the powers that be. It cannot be ascertained yet when the MACC will complete the investigation. It could all end well eventually but until they do, we will continue to value AirAsia at the low end of its historic 5-year valuation range (at -1.0SD below historical forward average). In the meantime, we question whether AirAsia would go so far as taking legal action and seek compensation from Airbus for the damage done to its reputation arising from this controversy. If they do, it should be welcome as a vote of confidence.

Outlook. Besides being embroiled in this corruption scandal, we expect tough operating environment to persist over the medium term with maintenance cost remaining high due to accounting treatment for aircrafts under sales and leaseback arrangements, and concerns over Wuhan virus outbreak which could derail propensity for air travel in the region.

Reiterate MP. TP is cut from RM1.70 to RM1.33 based on 8x FY20E EPS (-1.0SD below 5-year historical forward mean) (previously 10x). The lower PER is due to potential de-rating in the aviation industry due to concerns over the Wuhan flu outbreak which could derail propensity for air travel in the region and particular to AirAsia, uncertainties over the outcome of investigations by MACC and the SC.

Risks include lower-than-expected RASK and higher-than-expected fuel costs, and higher-than-expected operating costs

Source: Kenanga Research - 3 Feb 2020