CGS-CIMB: AirAsia’s market pricing is “extremely blue skies”

EVEN as the share price of AirAsia Group Bhd has doubled over the past 12 months as investors priced in a travel recovery, CGS-CIMB Research has expressed concern that the latter “may have priced in more than they should”.

Stating that the budget carrier remains “a conundrum for us”, the research house is wary that the aviation recovery path could be more complicated than it looks.

“The most lucrative domestic travel routes for AirAsia is the West to East Malaysia crossing, but the states of Sabah and Sarawak still demand a pre-departure COVID-19 test which will dissuade travellers for its inconvenience and cost,” opined analyst Raymond Yap in an aviation sector review-cum-company update.

“Malaysia has so far continued to insist on overseas arrivals being subject to 14-21 day quarantine.”

While Thailand has opened up its ‘sandbox’ islands to Malaysians, many of AirAsia’s core regional aviation markets such as Indonesia, Singapore, Vietnam, China and Hong Kong continue to block Malaysians from entering, according to CGS-CIMB Research.

“High oil prices could dampen earnings as AirAsia no longer has any fuel hedges. The sudden return of seat capacity from many airlines all at once could put pressure on passenger yields due to intense competition,” cautioned the research house.

“Teleport may also experience deflation of its cargo yields as bellyhold cargo capacity is reinstated even if its cargo volumes pick up by riding on the budget airline’s network restoration.”

All-in-all, CGS-CIMB Research has reiterated its “reduce” rating on AirAsia with an unchanged target price of 23 sen.

At this juncture, the research house assumed that AirAsia’s “valuations are too rich to swallow” given that it is currently trading at more than five times its CY2021F revised net asset value (RNAV) of 23 sen which is in contrast to 2019 when the budget carrier traded at an average price-to-book value multiple of only 1.15 times.

“We think that the market has implicitly valued the group’s digital businesses at RM3.5 bil which is rich and assumes that AirAsia can succeed against incumbent digital behemoths – an assumption that we are not yet prepared to make,” the research house pointed out.

“We have not included the valuation of the digital businesses into our target price as we consider that the businesses are still in the early stages of development and may consume significant amounts of cash resources due to the presence of established and well-funded competitors.

In CGS-CIMB’s scenario analysis which factors in various assumed values for the ‘airasia Digital’ businesses, AirAsia’s RNAV will rise to 61 sen/share assuming RM2 bil value for the digital businesses or RM1/share assuming RM4 bil value and RM1.38/share assuming RM6 bil value.

At 10.37am, AirAsia was down 1 sen or 0.844% to RM1.18 with 18.35 million shares traded, thus valuing the company at RM4.6 bil. – Oct 18, 2021

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