KEY INVESTMENT HIGHLIGHTS

• Dispose its equity interest in AirAsia India

• AAIL stake is reduced to 16.33%

• We view this development positively as the transaction will help improve AAGB dire cash position

• Necessary to maintain level headedness on recovery expectation

• FY20-21F earnings estimate maintained

• Downgrade to SELL with unchanged TP of RM0.68 per share

Partial exit from India. Based on its recent announcement on Bursa Malaysia, AAGB through its subsidiary, Airasia Investment Limited (AAIL) has entered into a Share Purchase Agreement (SPA) to dispose its equity interest of 32.67% in AirAsia India (AAI). The transaction is between AAIL and Tata Sons Private Limited (Tata) for an approximate sum of RM152.8m (USD37.66m, USD/MYR:4.0515). The disposal is expected to be completed by the end of March 2021.

Remaining Stakes. AAI is a joint venture between Tata and AAIL (51:49). With the disposal of 32.67% equity interest, AAIL stake is reduced to 16.33% in the venture. Based on details disclosed, the remaining stake will be subject to a call option, exercisable by Tata at any time after the transaction is completed. Furthermore, there will also be a put option exercisable by AAIL in two tranches. The first tranche is exercisable from 1st March 2022 until 30th May 2022 and the second tranche is exercisable from 1st October 2022 to 31st December 2022. The total consideration for the remaining stake will be to an approximate sum of RM76.29m (USD18.83m).

Our take on the disposal. Similar to closure of AirAsia Japan, this announcement on AAI is long anticipated. AAI was never a profitable venture to the group and non-core market for AirAsia. We view this development positively as the transaction will help improve AAGB dire cash position. Management disclosed that the cash proceeds will be utilised as working capital in Q1 2021. Noteworthy to highlight, the group cash balances stood at RM618.2m, based on Q3FY20 result last November. With burn rate circa ~RM200.0m/month during 9M20, any additional cash generated will be a boon to the group.

Liquidity needs. Recall that 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.

Outlook on aviation. We foresee that air travel demand will recover meaningfully, however, only at a portion of prepandemic level for FY21. With vaccines introduction and subsequent administrations are in the horizon, we believe that there is a light at the end of the tunnel for aviation players. Currently, with positive development on the vaccine fronts, the recovery narrative can be gauge with better clarity. Furthermore, with governments and businesses are more adept at managing the pitfalls of the virus, we believe punitive measures that hinder air travel will gradually be eased and potentially lifted (e.g. travel bubbles between countries, universal screening for air travelers, etc.)

Necessary to maintain level headedness on recovery expectation. On the other hand, we maintain our stance that safety is the paramount driver for sustainable recovery. Without it, demand for air travel will remain low, at least, not in the level that is sufficient to save the industry from further losses. Key considerations to our assumption are on the timing of vaccines approval, and of course successful and impactful administration of vaccines in large scale. We believe these two circumstances will predate a sustainable and meaningful recovery of air travel demand. We are hopeful on aviation recovery but maintain level headedness in assessing the viability of the recovery. Whilst the new course charted seemed conservative, we consider it as a precautionary and reasonable at a time when sentiment lifted the share prices of aviation players which may be excessive given uncertainty surrounding vaccines introductions and administrations.

Earnings forecast. We maintain our earnings forecast as we anticipated this development.

Target price. We are maintaining our target price at RM0.68 per share, pegged to 0.7x P/BV FY21F.

Downgrade to Sell. We believe the recent ascension of the share price might overshoot the valuation level that we deem fair for the company as of now. With potential rights issue exercise on the horizon, dilution to investors shareholdings seems inevitable. With that, we are downgrading our call on AAG to SELL from Neutral previously. We opine that although recovery for the aviation sector and air travel is expected to gradually take place in 2021, it remains an uphill battle for AAG given that it is struggling financially to remain afloat in the current pandemic-laden operating environment. Key risks to our call include, (i) faster-than- expected travel demand recovery, (ii) worsening pandemic, and (iii) stricter movement controls order imposed on air travels.

Source: MIDF Research - 31 Dec 2020