PETALING JAYA: The global aviation industry has been badly hit by the coronavirus outbreak, with no exception for local airlines. However, the impact on AirAsia X Bhd (AAX) looks to be more worrying and may need support from its affiliate AirAsia Group Bhd (AAGB).
This is given that AirAsia X’s balance sheet is weak, said HLIB Research.
“Moreover, the ongoing scandal allegations on both top executives of AAGB have created more uncertainty,” it said in a report yesterday.
HLIB Research said AAGB is currently suffering low load factor and yields due to the virus outbreak with no meaningful recovery in sight in the next six months.
“We understand that AAGB has been cancelling flights for China sector while suffering low load factor for other sectors... We expect AAGB to re-adjust its capacity to more domestic and India sectors (limited number of cases) and postpone the delivery of aircraft in 2020. We believe any recovery of air travel demand will at earliest, only be realised in Q3’20.”
Meanwhile, the research house expects AAX’s operation to worsen in 2020 amid weak balance sheet and cash position.
As at the nine-month period of 2019 (9M19), AAX had cash of RM401 million with a total debt of RM6.25 billion. During the same period, it registered negative operating cashflow of RM200 million, while its current positive cash position was sustained from its sales and leasebacks contract amounting to RM909 million in proceeds.
With the ongoing episode of the group’s alleged scandal, HLIB reckoned that investors are likely to place discounts towards AAGB at least in the near term, given the leadership uncertainty, perceived or otherwise.
Nevertheless, the drop in oil price has provided some cushion to the deteriorating outlook of the group.
Global oil price has dropped to US$55 a barrel (brent) due to the outbreak of Covid-19 affecting China’s demand for oil. Similarly jet fuel price has also trended down to US$63 a barrel (from recent US$82 a barrel), which will lower down AAGB’s operational costs, partially cushioning the impact of lower yields and declining load factor. However, it has already hedged up to 72% (potentially higher by now) of its 2020 jet fuel requirements at brent oil price US$60 a barrel.
HLIB cut AAGB’s earnings forecast for FY20 and FY21 by 74.9% and 28.9% respectively, following cuts in the yields and load factors, partially cushioned by lower jet fuel costs. It maintained a “hold” call a with a lower target price of RM1.16 from RM1.42.
“We have carried forward our valuation for Malaysia operation into FY21 as we believe FY20 will be affected by the outbreak of Covid-19, before full recovery in FY21. We have also lowered down our valuation for all other associates.”
