KEY INVESTMENT HIGHLIGHTS

• AirAsia Digital is the group digital venture arm
• Reaffirms Management’s determination in diversifying its core earnings away from traditional airline business model
• Demonstrates Management’s continued entrepreneurial drive, innovative spirit and prudence
• Premature to estimate any earnings contribution from this segment
• FY20-21F earnings maintained
• Maintain Trading Sell at a TP of RM0.40 per share

Information on AirAsia Digital. Yesterday, AirAsia released a fact sheet on AirAsia Digital, the group digital venture arm. Previously, it was launched in 2018 and was known as RedBeat Ventures. AirAsia Digital comprises of three main pillars, namely Venture Builder, RedBeat Academy and Data Centre. As one of two main divisions in the group, AirAsia Digital aims to focus on developing, incubating and accelerating companies with the potential to; (i) maximize revenue or generate new revenue streams sustainably, (ii) better manage costs through increased efficiencies and productivity, and (iii) enhance the customers’ experience.

Opening Salvo of the new AirAsia. AirAsia still maintains its traditional segment which consists of AOCs and other airlines, F&B, Engineering and Ground Handling. However, this digital move reaffirms Management’s determination in diversifying its core earnings away from the traditional airline business model while retaining its competitive edge and know how in the tourism business. Despite the aggressive marketing of its digital platform, at this juncture, it is still premature to estimate any earnings contribution from this segment as the businesses are still loss making and small relative to the overall group. Regardless, we look upon this development favorably as it demonstrates Management’s continued entrepreneurial drive, innovative spirit and prudence amidst the pandemic that ravages aviation industry.

Funding details are scant. The group expressed interest to raise capital for its digital business arm. So far, the management only indicated on new debt capital for Teleport and Santan, to be announced later. Teleport provides logistics services and Santan is its F&B business.

Covid-19 is everywhere, still. Unfortunately for AAGB and other aviation players, the virus is still looming large and continues to be a threat to safety and economic wellbeing. In Malaysia, the cases are spiking again with the potential to further spread-out as restrictions are relaxed and the ongoing Sabah election. So far, there is only one politician that has been diagnosed positive with Covid. Furthermore, in other key markets for the group such as Thailand, Indonesia and Philippines, the number of new cases daily is still in the thousands, except in Thailand. The country recorded only 3 new cases as of yesterday.

Earnings forecasts maintained. While the details on the potential contribution from AirAsia Digital remains scarce, we opine that these sorts of digital initiative will take a couple of years to bear fruit. 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. 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, we believe that 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 - 25 Sept 2020