KEY INVESTMENT HIGHLIGHTS

• AirAsia Japan (AAJ) is going to suspend its operation in Japan temporarily beginning in October 2020

• In 2019, AAJ showed an increment by more than 70%yoy, which made them among the fastest growing carrier in the group

• AAJ were not spared from Covid-19 as operating statistics were decimated

• Japan remains wary for fear of resurgence of a third wave

• FY20-21F earnings maintained

• Maintain Trading Sell at a TP of RM0.40 per share

Temporary hiatus. Based on recent news flow, AirAsia Japan (AAJ) is expected to begin suspending its operation in Japan temporarily beginning in October 2020 - due to poor demand caused by Covid-19. Operation will be halted on the 1st October 2020 with possible suspension until the 24th October 2020, at the earliest. This is going to impact all of its three domestic routes which connects the carrier’s base in central Japan - Chubu to Sendai, Sapporo and Fukuoka. This is the second suspension of the year after the carrier suspended their operation back in April which was also due to the Covid-19 pandemic. Note that, AAJ is the smallest unit in AirAsia group with just three planes of Airbus A320.

Flying high in 2019. Back in 2019, AirAsia Japan recorded revenue of circa RM152.00m with a net operating loss of -RM161.66m and a PBT of -RM1.74m. Despite the dismal FY19 numbers, these figures were recorded on the back of a tremendous growth, across the board, in its operating statistics. In 2019, key statistics such as passengers carried, capacity, ASK, RPK, among others shown increment of more than ~70%yoy, which made them among the fastest growing carrier in the group. This was during the pre-Covid period. Recent numbers as of 2Q20 (April-Jun), showed that AAJ was not spared from the crisis fallout as their operating statistics were decimated with more than ~ -90%yoy decline in almost all key statistics that we track.

Cases subsides, remain wary to avoid 3rd wave. As of September, Japan managed to rein on its Covid-19 infections as the country recorded declining daily cases averaging circa 500+ cases. This is relative to the peak of its second wave, in August, where number of cases recorded were more than 1900+. Overall, fatality rate was low at est. 1.9%, or 1,461 deaths. Despite this, Japan remains wary for the fear of resurgence of a third wave. Caution is vital after a short-live euphoria earlier this year, which has led to complacency as the country relaxed restrictions only to succumb to a much bigger second wave of infections.

Earnings forecasts maintained. Moving forward, AAGB will continue to operate in a challenging environment amidst persistent pandemic development, border control and other measures that remains inconducive for airline business to operate in. That said, we are not inputting any potential earnings deterioration coming from AAJ as we believe the impact is minute on the already grim backdrop for the group as well as; pending further disclosures from the Management. To reiterate our forecast, we are expecting a decline across the board, below FY19 level. Hence, we maintain our FY20E/FY21E earnings estimate, whilst maintaining positive earnings estimate FY22E.

Target price. We are maintaining our target price of RM0.40 pegged by 0.5x P/BV FY20 from PER 8.0x (EPS FY21F). This is to account for FY20E/FY21E expected core net losses and reflect the precarious circumstance of airline industry.

Maintain Trading SELL. Going forward, we are uncertain of how the “new norm” will alter consumer demand for air travel even post COVID-19 as everything is up on the air. We believe that there might be possibility of shrinking market size, due to the regional economic contraction. Operationally, there is a small evidence of a potential recovery. Despite this, the odds are stacked against AAGB and we are not convinced yet on the recovery narrative. We maintain our TRADING SELL call on AAG as we remain wary of the bleak outlook that the airline is currently facing. A rerating catalyst for AAGB would a faster-than-expected recovery from the Covid-19 pandemic.

Source: MIDF Research - 18 Sept 2020