1HFY20 Core Net Loss (CNL) came in at RM1,802m compared to our/consensus net loss estimates of RM1,490m/RM1,623m for the full-year. The results came in below our expectation on lower-than expected passengers carried amidst sharply reduced capacity. This, in addition to larger than expected CASK led us to widen our loss forecast from RM1,490m to RM1,957m for FY20. No changes to our FY21E earnings. TP is cut from RM0.41 to RM0.38 based on 0.56x FY21E BVPS. Reiterate UP.

YoY, 2QFY20 revenue contracted 97% amid the unprecedented wide travel restrictions due to the Covid-19 pandemic. 2QFY20 group consolidated AOCs (Malaysia, Indonesia and Philippines) reported a 26ppts decline in load factor to 59% on the back of a sharply reduced capacity of 98% to just 345,970 seats. This is also reflected in a 98% decline in ASK. For 2QFY20, the number of passengers carried was down 98% YoY. The Group saw a pickup in key operational metrics in June as compared to May, such as: (i) tripling in the number of passengers carried by AirAsia Malaysia, (ii) doubling in the number of passengers carried by AirAsia Thailand, (iii) increasing by 10 percentage points in load factor, and (iv) achieving six times the number of passengers carried by AirAsia India; reflecting the strong rebound in demand for air travel. AirAsia Indonesia’s passengers carried fell by 99.8% YoY. 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. Group CASK (+>100%) rose faster than RASK (+3%) due to realised fuel swap losses on the back of reduction in fuel consumption and drastic fall in oil prices. This brings 2QFY20 core net loss to RM1.0b. 1HFY20 revenue fell 59%, in tandem with lower passenger growth (-61%). Coupled with higher CASK 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, this brings 1HFY20 CNL to RM1,802m compared to a core net profit of RM29m in 1HFY19.

Cut our FY20E assumptions and hence forecast a net loss of RM1,957m instead of RM1,489m. We reduced FY20E passenger capacity by 40%.

Outlook. The group has also restructured a major portion of the fuel hedge 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 already 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 30 June 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 RM0.41 to RM0.38 based on 0.56x revised FY21E BVPS (-1.5SD below 5-year forward historical average).

Risks include higher-than-expected RASK, lower-than-expected CASK and better-than-expected load factor.

Source: Kenanga Research - 26 Aug 2020