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KUALA LUMPUR (Aug 26): A rights issue by AirAsia Group Bhd, which is very likely to happen, will probably entail the airline operator issuing four billion new shares at 35 sen apiece to raise RM1.4 billion in new equity this year, CGS CIMB Research’s model showed.

Its analyst Raymond Yap added that the equity issue may spill over into FY21F.

“AirAsia saw an operating cash outflow of RM956 million during 1H20, in addition to RM773 million in principal and interest repayments on its lease liabilities. As a result, AirAsia saw its cash balance decline by RM1.6 billion over the first six months of the year, to RM996 million (decline of RM1 billion in 1Q20, followed by a further RM0.6 billion drop in 2Q20),” he noted.

“The drop in the cash balance slowed in 2Q20 because AirAsia stopped payments of virtually all of its lease liabilities during the 2Q20 and also implemented substantive cost cuts. The cash burn should slow even more in 3Q20 as AAGB worked to restructure the majority of its excess fuel hedges and also restarted domestic flights in Malaysia when interstate travel was permitted from 10 June,” Yap added.

He noted that with regional travel off the table until FY21F at least, especially considering the high level of infections prevailing in Indonesia, Philippines and India, AirAsia admitted that it may need to raise up to RM2.5 billion in new capital, which he believes is on the assumption that its aircraft lessors continue to agree to some level of lease payment postponements, without which the amount of capital needed may be even higher.

The local research house pointed out that potential derating catalysts for the stock include slower-than-expected recovery in domestic travel demand due to the shortening of the year-end school holidays in Malaysia from six weeks to only two weeks and weaker-than-expected recovery in international travel demand due to sustained Covid-19 border closures and/or the reluctance of passengers to travel on longer-distance flights.

“Another potential derating catalyst is a dilutive equity issue sometime in the foreseeable future. Downside risks include potentially higher-than-expected jet fuel prices should the OPEC+ production cuts continue for an extended duration; we have pencilled in Brent crude oil price assumptions of US$41/bbl and US$49/bbl for FY20F and FY21F, respectively, and jet fuel price assumptions of US$43/bbl and US$51/bbl for those same years. Brent is currently trading at US$45/bbl, with the jet fuel spot price at US$44/bbl, both above our full-year averages,” it said.

“Upside risks include a potential discovery of a Covid-19 vaccine, which may help restore confidence in air travel. A stronger-than-expected ringgit exchange rate vs. the US$ is another upside risk; we have used an average rate of RM4.20:US$1 but the ringgit is currently trading at RM4.18. Approximately 70% of AAGB’s pretax cash costs are denominated in US$,” it added.

Following its record quarterly net loss of RM803.55 million in the first quarter ended March 31, 2020, AirAsia sank further into the red with a net loss of RM992.89 million in its second quarter ended June 30.

For the six months ended June 30, 2020, AirAsia registered a net loss of RM1.8 billion versus a net profit of RM111.8 million a year earlier while revenue dropped 57% to RM2.43 billion from RM5.65 billion.

CGS CIMB Research reiterated its reduce call for the stock and lowered its target price to 15 sen from 58 sen.

AirAsia’s stock is currently trading at 69 sen, down 2.84%.

Read also:
AirAsia's net loss widens to RM993m in 2Q as full Covid-19 impact hits

Edited by Lam Jian Wyn


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