AIRASIA (5099) : AirAsia downgraded to Hold on receivables risk
KUALA LUMPUR: UOB Kay Hian Malaysia has downgraded Air Asia Bhd to Hold, as some RM1.3bil in receivables from Indonesia AirAsia (IAA) could be at risk.
The research house said on Tuesday that aside from reputational risks, there is also the question of indemnity cover for IAA, if it indeed operated unauthorised flights.
“On the flip side, Singapore Airlines (SIA) could gain market share at the expense of AirAsia group. Its ability to hedge fuel will enable it to lock in costs and improve margins. We thus raise SIA to Buy with a target price of S$14.00. Maintain Market Weight,” it said.
UOB Kay Hian Research issued the report on news reports that IAA’s flight QZ8501 reportedly not authorised to fly from Surabaya to Singapore on Sundays, raising indemnity issues.
The research house quoted a news report that Indonesia’s transport minister as saying flight QZ8501 was operating on an unauthorised flight as it did not have a permit to fly on Sundays.
An ongoing investigation will determine if IAA had violated its route permit. This will have ramifications on indemnity against claims on the aircraft and other liabilities.
“Although AirAsia has a 49% stake in IAA, it will not face a direct liability as it is a separate legal entity,” it said.
“Potential impairment of AirAsia’s receivables from IAA. While AirAsia’s equity stake in IAA has already been written down fully, the latter still has payables of about RM1.3bil to AirAsia, which could be impaired. This amounted to 47 sen per share as at September 2014 or about 24% of its estimated 2014 book value.
“While AirAsia has done an admirable job in handling the crisis, there is a reputational risk for the AirAsia group. Collectively, the AirAsia group holds 58% of
intra-Asean low-cost carrier (LCC) capacity and about 34% of total intra-ASEAN seat capacity.
“This share could erode in the coming months if events deteriorate further. At the very least, this could lead to lower loads or lower pricing power,” it said.
UOB Kay Hian Research pointed regional FSCs, particularly SIA, could be beneficiaries.
While full-service carriers (FSC) operate the same type of aircraft (A320) as AAI on short Asean routes, they could see increased loads on short-haul Asean routes and thus increased profitability.
“The Singapore Airlines Group (SIA, Scoot, Silk Air and Tigerair) has the highest absolute seating capacity among Asean FSCs, and 37% of its seating capacity is slated towards Asean. If passengers make a switch to FSCs, SIA will be the primary beneficiary.
“Continued weak fuel prices will provide airlines with an opportunity to hedge fuel at attractive prices. Spot jet fuel currently stands at US$70/bbl and has declined by 44% from mid-June 2014’s US$122 per barrel.
“Airlines such as SIA and Cathay Pacific have mandates to hedge for two to three years and they could take advantage of the current low prices to lock in fuel requirements. Cathay Pacific, in particular, could hedge forward by up to 36 months,” it said
http://www.thestar.com.my
KUALA LUMPUR: UOB Kay Hian Malaysia has downgraded Air Asia Bhd to Hold, as some RM1.3bil in receivables from Indonesia AirAsia (IAA) could be at risk.
The research house said on Tuesday that aside from reputational risks, there is also the question of indemnity cover for IAA, if it indeed operated unauthorised flights.
“On the flip side, Singapore Airlines (SIA) could gain market share at the expense of AirAsia group. Its ability to hedge fuel will enable it to lock in costs and improve margins. We thus raise SIA to Buy with a target price of S$14.00. Maintain Market Weight,” it said.
UOB Kay Hian Research issued the report on news reports that IAA’s flight QZ8501 reportedly not authorised to fly from Surabaya to Singapore on Sundays, raising indemnity issues.
The research house quoted a news report that Indonesia’s transport minister as saying flight QZ8501 was operating on an unauthorised flight as it did not have a permit to fly on Sundays.
An ongoing investigation will determine if IAA had violated its route permit. This will have ramifications on indemnity against claims on the aircraft and other liabilities.
“Although AirAsia has a 49% stake in IAA, it will not face a direct liability as it is a separate legal entity,” it said.
“Potential impairment of AirAsia’s receivables from IAA. While AirAsia’s equity stake in IAA has already been written down fully, the latter still has payables of about RM1.3bil to AirAsia, which could be impaired. This amounted to 47 sen per share as at September 2014 or about 24% of its estimated 2014 book value.
“While AirAsia has done an admirable job in handling the crisis, there is a reputational risk for the AirAsia group. Collectively, the AirAsia group holds 58% of
intra-Asean low-cost carrier (LCC) capacity and about 34% of total intra-ASEAN seat capacity.
“This share could erode in the coming months if events deteriorate further. At the very least, this could lead to lower loads or lower pricing power,” it said.
UOB Kay Hian Research pointed regional FSCs, particularly SIA, could be beneficiaries.
While full-service carriers (FSC) operate the same type of aircraft (A320) as AAI on short Asean routes, they could see increased loads on short-haul Asean routes and thus increased profitability.
“The Singapore Airlines Group (SIA, Scoot, Silk Air and Tigerair) has the highest absolute seating capacity among Asean FSCs, and 37% of its seating capacity is slated towards Asean. If passengers make a switch to FSCs, SIA will be the primary beneficiary.
“Continued weak fuel prices will provide airlines with an opportunity to hedge fuel at attractive prices. Spot jet fuel currently stands at US$70/bbl and has declined by 44% from mid-June 2014’s US$122 per barrel.
“Airlines such as SIA and Cathay Pacific have mandates to hedge for two to three years and they could take advantage of the current low prices to lock in fuel requirements. Cathay Pacific, in particular, could hedge forward by up to 36 months,” it said
http://www.thestar.com.my
