1QFY20 Core Net Loss (CNL) came in at RM772m compared to our/consensus net loss estimates of RM527m/RM1,046m for the full year. The results came in below our expectation due to lower than-expected load factor. We widened our loss forecast from RM527m to RM1105m for FY20. No changes to our FY21E earnings. Roll forward our valuation base from FY20E to FY21E. TP is cut from RM0.60 to RM0.52 based on unchanged 0.5x FY21E BVPS. Reiterate UP.

YoY, 1QFY20 revenue contracted 22% amid increasing and unprecedented travel restrictions due to the Covid-19 pandemic. 1QFY20 group consolidated AOCs (Malaysia, Indonesia and Philippines) reported an 11pts decline in load factor to 77% which trailed a lower ASK (-37%). As a result, for 1QFY20 YoY, the number of passengers carried was down 22% as capacity was reduced by 11%. Capacity reductions were mainly from Malaysia and Philippines with a reduction of capacity of 17% and 1%, respectively, as domestic routes and international routes were halted mid-March. Indonesia routes, however, increased capacity by 10% by redeploying the excess international routes capacity to domestic markets. Malaysia saw average fares increasing by 12%, Indonesia 11% whilst Philippines average fare fell by 9%. Group CASK (+38) rose faster than RASK (+2%) on improved pricing strategy in Malaysia and Indonesia. The higher CASK was due to fuel hedge losses as prices fell on the back of lower demand of oil, higher maintenance and depreciation and lease liabilities interest as a higher number of aircraft was on operating lease. 1QFY20 CNL recorded losses of RM772m compared to a core net profit of RM4m in 1QFY19 due to: (i) lower load factor of 77% in 1QFY20 compared to 88% in 1QFY19, (ii) higher CASK as mentioned above and, (iii) sale and leaseback programme which requires AirAsia to make provisions or expense off maintenance provisions rather than capitalise and amortise over the useful life of the major overhaul.

Outlook. The group has also restructured a major portion of the fuel hedges with supportive counterparties and are still in process of restructuring the remaining exposure. AirAsia has resumed its scheduled domestic flights commencing with Malaysia on 29 April 2020, followed by Thailand (1 May 2020), the Philippines (1 June 2020) and India (4 May 2020). However, over the medium term, we expect AirAsia to face tough operating environment derailed by widespread travel disruptions due to the COVID-19, to be hit by lower load factor. The group have applied for bank loans in their respective operating countries to shore up liquidity, with net cash currently at RM1.0b as at 31 March 2020. In addition, AirAsia has ongoing deliberations with a number of parties for joint-ventures and collaborations that may result in additional third-party investments in specific segments of the group's business.

Cut our FY20E assumptions and hence forecast a net loss of RM1105m instead of RM556m. We cut our load factor assumption from 79% to 72%.

Reiterate UP. Our TP is cut from RM0.60 to RM0.52 based on unchanged 0.5x FY21E 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 include higher-than-expected RASK and better-than-expected load factor

Source: Kenanga Research - 7 Jul 2020