KEY INVESTMENT HIGHLIGHTS

• Operating environment continued to be unfavourable for AAX and the aviation industry
• The airline is in a financial distress without its scheduled flights since April
• Financial performance continues to dip with widening losses recorded in 3QFY20
• The group is in the midst of debt restructuring
• Vaccines are not magic bullet yet
• Downgrade to SELL with a unchanged TP of RM0.05/share

Still in hibernation mode. For all intents and purposes, AAX is still in hibernation mode. With suspension of scheduled flights since April 2020, the airline is in financial distress.

Harder hit than 2Q20. In 3QFY20, the company recorded a widening year-over-year loss of -RM308.52m (-1%qoq and -34%yoy). This is on the back of lower revenue at RM59.9m (-34%qoq and -94%yoy). Cumulatively, its earnings performance is below consensus estimate at – RM1.16b for 9MFY20 vs –RM1.39b for full year FY20, representing - 11.4% deviations against the benchmark for the same period. However, against our expectation, the company recorded lower losses than expected compared to our estimate which stood at –RM2.22b, representing circa +30% positive differences.

Debt restructuring. Currently, the group is in the midst of a debt restructuring process. Recall that, part of the proposal is a debt exercise to restructure ~RM63.5b of debts to be reconstituted into an acknowledgement of indebtedness by AAX for a principal amount of up to RM200.0m. Aside from its proposed debt restructuring, the company also intends to undertake a proposed reduction of 90% of the issued share capital and consolidation of every 10 existing ordinary shares in AAX into 1 AAX share. AAX asserts that these proposals are vital for the survival of the Group as well as its ability to remain a going concern, which requires significant concessions from its suppliers, creditors and financiers. Bursa has granted extension until 6 January 2021 to submit the application for the proposed share consolidation.

…so, what is next? AAX is planning to raise RM500m to jump start the airline post its debt restructuring. The company disclosed that it is imperative that the debt restructuring has to be completed and successful before any formalization for any fund raising exercise can be entered into.

Vaccine news is good, BUT.. We are elated on the recent news of vaccine efficacy by Pfizer and Moderna. It is a very positive indication that we might have a successful and usable vaccine in the near future. In general, aviation industry is expected to rebound once travel restrictions are lifted and air travels start to begin in earnest. That said, at this juncture we opine that it will take many more months before air travels to will resume to the pre-Covid19 level that is sufficient to save the industry from further losses – while we await for vaccines to hit the shelves and newly infected cases to be contained worldwide. However, for AAX, the bigger issue will be the completion of its debt restructuring and fund raising exercise as the company existence is highly reliant on the outcome of these two corporate exercises. Once completed, we opine that the company will be in more comfortable position with lesser baggage on its balance sheet. Without it, AAX future as an airline might continue to be uncertain.

Earnings estimates. With recent result inputted in and uncertainty face by AAX, we increase our estimate for FY20E to smaller core net losses of –RM-1.5b from -RM2.2b.

Target Price. Target Price. We maintained our target price to RM0.05 by using P/S method.

Price has retraced significantly; downgrade to SELL. The airline industry is expected to continue to be adversely impacted by the ongoing developed brought upon the Covid-19 pandemic and we reiterate our view that passengers carried are bound for a temporary decline during the virus outbreak and a prolonged recovery of the industry is a nonexaggeration. The operational environment is then further exacerbated by the financial conundrum that AAX is currently facing.

As such we are downgrading our recommendation on AAX to SELL (from Neutral previously). We believe that the price appreciation is premature buoyed by market euphoria surrounding the vaccines news.

Source: MIDF Research - 20 Nov 2020