AirAsia’s reported 1QFY20 preliminary operating statistics were generally lower across the board, reporting a group wide load factor of 80% which is within our full-year expectation of 75% as we expect lower loads in subsequent quarters due to travel restrictions caused by the pandemic. Our TP is RM0.60 based on unchanged 0.5x FY20E BVPS. Maintain UNDERPERFORM.

1QFY20 operating statistics indicating a weak quarter. AirAsia’s 1QFY20 operating statistics were generally lower across the board, reporting a group-wide load factor of 80% which is within our full-year expectation of 75% as we expect lower loads in subsequent quarters due to travel restrictions caused by the pandemic. Generally, passengers carried and ASK were lower across the board. Management has undertaken proactive capacity management, particularly in the months of February and March, with cost cutting most notable in AirAsia Malaysia and AirAsia Thailand. 1QFY20 group consolidated AOCs (Malaysia, Indonesia and Philippines) reported a 10pts decline in load factor to 78% which trails a lower ASK (-19%). As a result, YoY for 1QFY20, the number of passengers carried was down 21% as capacity was reduced by 11%. AirAsia Indonesia posted a 10% YoY increase in capacity in 1QFY20 despite a lower ASK (-4%) as the company re-deployed excess capacity from international to domestic sectors. Passengers carried decreased by 7% as travel demand in the region started to weaken, while load factor was weak at 74%. However, PAA passengers carried was lower by 9% on the back of capacity cut by 1% YoY as domestic routes and international routes were halted beginning mid-March 2020. Load factor was solid at 84%. TAA capacity was reduced by 17% while ASK declined by 30% as Thailand’s network was realigned through frequency reduction and flight suspension on international routes due to increasing travel restrictions and redeployment of excess capacity to domestic sectors. TAA passengers carried were lower by 23% despite recording 84% load factor. AirAsia India reported a 30% growth in passengers carried to 2.5m with the 43% additional capacity contributed by 10 more aircrafts, YoY.

Outlook. Over the medium term, even when the services are reinstated, the road to recovery for air travel might take longer than expected. 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 virtual collapse in air travel. As such, over the medium term, we expect AirAsia to face an extremely tough operating environment derailed by widespread travel disruptions due to the COVID-19, and 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 process and mired with losses.

Reiterate Underperform. Our TP is 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.

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

Source: Kenanga Research - 28 Apr 2020