KEY INVESTMENT HIGHLIGHTS

• Losses widened due to Covid-19 measures

• Airline operating expenses reduction off est. -47% was commendable yet insufficient

• Expect similar poor performance to persist in 4Q20 due to unabated pandemic

• We slashed earnings estimate FY20E, but revise upwards our FY21F PAT forecast premise on the recovery

• Upgrade to NEUTRAL at a revised TP of RM0.68 per share

Losses widened. AAGB continues to be severely hit following a slew of Covid-19 triggered events which have highly impacted its business operations during the year. This resulted in AAGB recording a 3QFY20 normalised net loss of –RM1.3b (-34%qoq and -638%yoy). This was on the back of RM387.3m 3QFY20 revenue (-469%qoq and -87%yoy) arising from most planes being grounded for several months due to border controls and movement restrictions orders. Cumulatively, for 9M20, earnings deviated from ours and consensus expectation by -44% and -62% respectively.

Bleeding arresting however, it was insufficient. The group cost cutting measures are not enough to stem the shortfall in revenue. Despite the commendable effort, airline operating expenses reduction of est. -47% was insufficient to cover circa -87% declines in airline revenue. Furthermore, the loss is widened from its fuel hedging losses of RM281m during the quarter. Recall that, AAGB usually hedges circa 50-60% of its fuel consumption annually.

Quarterly improvement on operating statistics. Based on our observation, key operating statistics have improved tremendously compared to last quarter. RPK, ASK, and passengers carried saw multifold increase, all more than >+100%qoq, yet remains far below its pre-Covid level with average -85%yoy contraction among the key operating statistics. This quarterly improvement was within expectation as total lockdown was lifted and certain intra-states movement was allowed before control was imposed again, recently. We can expect similar performance to persist in 4Q20 due to unabated pandemic.

Liquidity solved? While we acknowledge AAGB’s strong relationship with its stakeholders; we do not discount the possibility of a softer-thanexpected financial market. Management indicated a conservative estimate that the group capital needs of between RM2-2.5b to tide them over comfortably until end of FY2021. In Malaysia, AAGB are securing commitments from Banks under Danajamin Prihatin Guarantee Schemes while their Philippines and Indonesia entities are currently in various stages of bank loan applications. There are talks on capital raising on equity market but so far nothing is concrete yet, except there is urgency to the exercise as management wanted to complete the bulk of fundraising by end of January 2021.

Fund allocation. Based on management disclosure, the allocation for of fund from its capital raising exercise is earmarked for setting up new airlines in Southeast Asia for future growth, as well as settlement of creditors (fuel hedges, lessors, trade creditors and refund for passengers). What remains will be part of the group dry powder as the company rebuild themselves post pandemic.

Earnings revision. Moving forward, AAGB will continue to operate in challenging environment amidst ravaging pandemic, border control and other measures that remains unconducive for airline business. Operationally, we are expecting a decline instead of growth across the board, below FY19 level. We are slashing our FY20E from core net losses of -RM2.7b to – RM3.35b, -24% lower due to higher than expected losses for 3QFY20. However, with vaccine developments indicating encouraging results and AirAsia has been managing its cost base very successfully, we forecast a slight positive PAT for FY21F at RM109.4m, in comparison of –RM435.0m losses from previous forecast. This is premised on the strong return of air travel demands, slated in 2H21, due to vaccine availability, albeit limited accessibility. However, it is sufficient to act as catalyst for a rebound in air travel.

Target price. Following our earnings revision, we are also revising our target price to RM0.68 (from RM0.40 previously), pegged by 0.7x P/BV FY21F from P/BV 0.5x FY20E.

Upgrade to Neutral. Despite how the odds are stacked against AAGB, we believe the group is poised to survive this pandemic with stringent cost control and continue innovation of its business model. We upgrade our call to NEUTRAL from Trading Sell to account for the expected recovery of air travel demands in 2H21.

Source: MIDF Research - 25 Nov 2020