Investment Highlights

• We cut our FY19, FY20F and FY21F net profit forecasts by 40%, 30% and 29% respectively. This is to better reflect AirAsia’s high aircraft maintenance provisions under the leased aircraft model (vs. the owned aircraft model previously). We are also factoring in higher jet fuel price assumption for FY20F following the surge in crude oil prices after Saudi Arabia’s oil facilities suffered drone attacks over the weekend.

• We cut our FV by 30% to RM1.45 (from RM2.07) based on 8x revised FY20F EPS. At 8x, we value AirAsia at a discount to an average forward P/E of 11x of global peers Ryanair and Southwest Airlines to reflect AirAsia’s relatively smaller market capitalization. Downgrade our call to SELL from HOLD.

• We raise our average jet fuel price in FY20F to US$92/bbl from US$87/bbl, while maintaining assumptions of US$79/bbl in FY19F (as fuel cost has been largely locked in) and FY21F (assuming damaged capacity in Saudi Arabia is to be gradually restored). We also take into consideration of AirAsia having hedged forward 65%, 73% and 19% of its fuel requirements (Brent Crude) in FY19, FY20F and FY21F at US$63.31/bbl, US$60.22/bbl and US$59.45/bbl respectively. For every US$1 change in our jet fuel price assumption, AirAsia’s FY20F earnings will deviate by 2%.

• The positive outlook for Malaysia’s tourist arrivals (ahead of the Visit Malaysia Year 2020) will serve as a tailwind to AirAsia’s key strategy to aggressively grow its top line. However, this will be eroded by AirAsia’s higher cost structure arising from its planes that are now largely leased vs. owned previously, coupled with an elevated earnings risk on sustained high crude oil prices (at least over the next 6–12 months) with increased geopolitical risk in the Middle East.

Source: AmInvest Research - 17 Sept 2019