AirAsia’s reported 2QFY20 preliminary operating statistics were generally lower across the board, reporting a group wide load factor averaging 59% bringing 1H20 to 77% which we consider to be below our full-year expectation of 72% as we expect lower passengers carried in subsequent quarters. We widened our FY20E losses to RM1,489m from RM1,105m. We now forecast a loss of RM275m in FY21 instead of a profit of RM194m. Correspondingly, TP is reduced from RM0.52 to RM0.41 based on unchanged 0.5x revised FY21E BVPS. Maintain UNDERPERFORM.

2QFY20 operating statistics indicating a weak quarter. AirAsia’s 2QFY20 operating statistics were generally lower across the board, reporting a group-wide load factor of 59% bringing 1H20 to 77% which we consider to be below our full-year expectation of 72% as we expect lower passengers carried in subsequent quarters. 2QFY20 group consolidated AOCs (Malaysia, Indonesia and Philippines) reported a 26pts decline in load factor to 59% which trails a lower ASK (-98%). As a result, YoY for 2QFY20, the number of passengers carried was down 98% as capacity was reduced by 98%. Generally, passengers carried and ASK were lower across the board. In terms of outlook, going forward, the Group saw a pickup in key operational metrics in June as compared to May, including tripling the number of passengers carried by AirAsia Malaysia, doubling the number of passengers carried by AirAsia Thailand, and increasing 10 percentage points in load factor while reaching 6 times the number of passengers carried by AirAsia India, reflecting the strong rebound in demand for air travel. AirAsia Indonesia’s number of passengers carried fell by 99.8% YoY. AirAsia Indonesia resumed operations on 19 June with 5 routes. At the end of July, the daily sales have reached 5 times the daily sales recorded in early June. In May 2020, AirAsia Thailand reinstated domestic flights in phases and with the encouraging rebound in traffic, AirAsia Thailand operated at 18% of pre-Covid-19 capacity in June 2020. In 3Q and 4Q of this year, AirAsia Thailand expects to operate at 75% and 95% of pre-Covid-19 domestic capacity, respectively. AirAsia India restarted its domestic operations on 25 May 2020, and was quick to ramp up to 30% of pre-Covid-19 capacity in June 2020, with 36 operational routes.

Cut our FY20E assumptions and hence forecast a net loss of RM1,489m instead of RM1,105m. We now forecast a loss of RM275m in FY21 instead of a profit of RM194m. We cut our load factor assumption from 72% to 68%.

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. Over the medium term, we expect AirAsia to face tough operating environment derailed by widespread travel disruptions due to the COVID-19, and hits from lower load factor. The group have applied for bank loans in their respective operating countries to shore up liquidity to help fund working capital and repayment of lease liabilities, which stand at RM12.2b 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.

Reiterate UP. Our TP is cut from RM0.52 to RM0.41 based on unchanged 0.5x revised FY21E BVPS (-1.5SD below 5-year forward historical average).

Risks include higher-than-expected RASK and better-than-expected load factor

Source: Kenanga Research - 12 Aug 2020