KEY INVESTMENT HIGHLIGHTS

• Capacity cuts are inevitable amidst coronavirus outbreak

• International flight license in India to possibly face headwinds

• AAGB began to hedge for crack spread in light of weak oil prices

• Co-founders of AAGB have relinquished their executive roles following the alleged Airbus corruption case

• Earnings estimates unchanged

• Downgrade to NEUTRAL with revised TP of RM1.20 per share on adjustment to valuation

Capacity cuts are inevitable. As highlighted in our report dated 30 January 2020, we have slashed earnings forecast for AAGB following a more conservative capacity assumption in light of the coronavirus outbreak. Recall that AAGB’s capacity to China stands at around 13% of overall capacity. With capacity management being in focus to manage load factors, we understand that this could result in a delay for the 12 net additions of new aircraft for (6 A321neos, 6 A320 neos) in FY20. Nevertheless, AAGB may renew its lease contracts for five aircraft that are expiring in 2020. This would lead to cheaper lease rates, cushioning the ongoing impact of the MFRS 16. On a broader scale, AAGB noted that the delays of the Boeing 737 Max coming back into service had a neutral impact towards the overall leasing market.

Expansion plans for India expected to stay on track. We gathered that AirAsia India may stick to the current capacity expansion plans given growth prospect in the Sub Continent. Meanwhile, AAGB is still in the midst of obtaining the international flight license from the government. We foresee granting of international flight license to drag for another few months as the overall travel sentiment particularly in Asia is already badly affected following the coronavirus. The overseas permit was expected to be granted to AirAsia India by October 2019 after the Delhi High Court refused a plea to stop the award of overseas permit to the company.

Slight changes in hedging policy. In light of the sharp drop in Brent crude oil to below USD60pb, AAGB recently began to hedge the crack spread (difference between Brent price and jet fuel price) at around USD10pb (crack spread is usually USD12pb to USD14pb), representing roughly 15% of fuel requirements. As a result, AAGB’s current effective jet fuel price is approximately USD70pb, lower than was previously budgeted.

Potential questions on corporate governance issues may arise. Another concern which had arisen lately is the alleged Airbus corruption case which court documents state involve two executives of AAGB and AAX. AAGB has denied these allegations against both AAGB and AAX. Meanwhile, the Malaysian Anti-Corruption Commission (MACC) announced that investigations with the authorities in the U.K have begun while MAVCOM will assess if there is any contravention of the MAVCOM Act 2015 (Act 771) and the Commission’s Guidelines on Fit and Proper Person.

Source: MIDF Research - 4 Feb 2020