We are expecting more loses ahead following the COVID-19 pandemic which is taking its toll on airlines operators including AirAsia due to the restrictions and collapse in air travel. We now expect lower load factors and yields, heavily affected by travel restrictions, causing AirAsia to hibernate flights across its operating countries in Asean. We cut our FY20E assumptions and hence forecast a wider net loss of RM527m instead of RM258m. Our TP is lowered from RM1.00 to RM0.60 based on unchanged 0.5x FY20E BVPS (- 1.5SD below 5-year forward historical average). Maintain UNDERPERFORM.

Temporarily hibernating all international and domestic flights. AirAsia Malaysia will temporarily suspend all international and domestic flights from Mar 29 to April 25, while AirAsia Philippines will be suspended from Mar 20 to April 14. Additionally, AirAsia Indonesia will see a sharp reduction in frequency in its international flights. Similarly, AirAsia Thailand will halt its international flights from March 22 to April 25. Both airlines will operate domestic flights at reduced frequency. Over the medium term, even when the services are reinstated, the road to recovery for air travel might take longer than expected.

Outlook. We are expecting more losses ahead following the COVID-19 pandemic which is taking its toll on airlines operators including AirAsia due to the restrictions and collapse in air travel. As such, over the medium term, we expect AirAsia to face extremely tough operating environment derailed by widespread travel disruptions due to the COVID-19, to be hit by both lower ticket prices and load factor which are likely to drag down yields, and hence a very challenging earnings outlook ahead. With a net cash of RM2.2b as at 31 December 2019, we expect AirAsia to be able to weather through this COVID-19 crisis and hopefully without deteriorating its balance sheet. Nevertheless, in the meantime, the sector could be further de-rated by longer-than expected recovery and mired with losses. Elsewhere, we expect maintenance cost to remain high due to accounting treatment for aircrafts under sales and leaseback arrangements.

Cut our FY20 assumptions and hence forecast a wider net loss of RM527m instead of RM258m. We cut our load factor assumption from 79% to 77% (vs 1H2020 management guidance is 78%) and lower our yield by 3%ppts to 14% due to lower demand as a result of the coronavirus.

Reiterate Underperform. Our TP is lowered from RM1.00 to RM0.60 based on unchanged 0.5x FY20E BVPS (-1.5SD below 5-year forward historical average). However, this is a high beta stock which could bounce up strongly when Covid-19 is finally overcome. For now, it is maintained at UNDERPERFORM.

Risks to our call include potential stimulus by the Government if any to help the local aviation industry.

Source: Kenanga Research - 30 Mar 2020