KEY INVESTMENT HIGHLIGHTS

• AirAsia has secured RM300m loan from Sabah Development Bank Berhad

• Loan earmarked to fund specific development projects

• AirAsia is first and foremost an airline company before anything else

• The core business is still in dire state as passenger traffics remain minimal amid worsening pandemic

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

Loan secured. Last Friday, AirAsia Group Berhad (AAGB) confirmed that the company has secured RM300m loan from Sabah Development Bank Berhad (SDB). As of now, the loan has been approved and disbursed to AirAsia group of companies.

Loan particulars. Both AirAsia and SDB has agreed for the loan to be earmarked to fund specific development projects; i) RM170 million to establish and operate OURFARM digital food supply chain and cold chain facilities in Sabah; ii) RM110 million to part-finance the project to turn Kota Kinabalu International Airport into an international hub for AirAsia Berhad's operations; iii) RM10 million to enhance e-commerce platforms and marketability of Sabah products; and iv) RM10 million to further promote Sabah tourism destinations on airasia.com, the digital super app of AirAsia. Furthermore, the group clarifies that this loan is not backed by a government guarantee.

OURFARM is AirAsia new business. As part of the management initiatives to diversify its core earnings away from the traditional airline business, OURFARM a farm-to-table (“F2B”) platform that connects businesses directly to producers. By harnessing on AirAsia’s ecosystem (e.g. cargo, logistics and payment capabilities), OURFARM is made of a network of 7,000 lorries and pickup trucks that can be utilised to perform pickup and delivery.

Our take on the loan. We believe that AirAsia will be able to utilize the fresh fund to benefit its business and grow OURFARM. However, to address the elephant in the room, AirAsia is first and foremost an airline company before anything else. The core business is still in dire state as passenger traffics remain minimal amid worsening pandemic. Staying power of the group is tested as months go by in this dire state and expected to continue to remain in this circumstance at least in the near future. In this regard, we opine that new funds designated specifically for its aviation business are needed to help the company to stay afloat.

Earnings forecasts maintained. At this juncture, we opine that it is still premature to estimate any earnings contribution coming from this segment as the OURFARM is still at a very early stage of its business cycle. We opine that this 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. 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 remain uncertain on 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. However, we believe that the odds continue to be stacked against AAGB and we are yet to be convinced on the recovery narrative. Hence, we are maintaining our TRADING SELL call on AAG at this juncture 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 - 26 Oct 2020