AllianceDBS Research is downgrading its call on AirAsia Group Bhd (AAGB) to fully valued from a hold with a lower target price of 40 sen from 80 sen previously.
The research house rates a stock as a fully valued call if the counter is expected to post a negative total return greater than 10% over the next 12 months.
AllianceDBS decided to cut its earnings projection after factoring in weaknesses in AAGB’s second quarter earnings. The low-cost carrier posted a net loss of RM992.89 mil for the second quarter ended June 30 (2Q20) compared to a net profit of RM17.34 mil last year.
AllianceDBS analyst Siti Ruzanna Mohd Faruk said her earnings cut comes on the back of an expectation that AAGB would remain in the red in the next few quarters, as the aviation industry wrestles with the Covid-19 pandemic.
“The pickup in volume remains slow and may not be able to overcome high fixed costs,” she wrote in an Aug 26 note.
While resumption in domestic travel might bode well for AAGB, Siti Ruzanna said that operation conditions would continue to remain tough.
“The group requires additional capital,” she said, citing ongoing discussion with banks for the Danajamin Prihatin Guarantee Scheme. Also on the table are debt and rights issuances.
AAGB is expected to raise RM2.4 bil and Siti Razunna expects the financing cost to weigh on future earnings. “We revise our earnings estimates to incorporate the 1HFY20 weakness due to COVID-19, thus resulting in higher losses in FY20 (from RM1 bil net loss previously),” she said.
A reduction of 60% in average seat kilometres (ASK) has also been factored in, Siti Ruzanna said, “as full capacity will only material in 2HFY21 at the earliest.”
She is also bearish on load factors. “We are maintaining it at c.73.3% for FY20 and this should improve slightly to 75% in FY21. All in all, we expect losses to hit c.RM2.2b bil for FY20,” she said.
Moving forward, the analyst is expecting recovery to be slow. “We prefer to stay on the sidelines for now. Downgrade to fully valued,” she said.
AAGB’s share price hovered 2.84% lower at 68 sen before the midday break, giving the low-cost carrier a market capitalisation of RM2.29 bil.
