CGS-CIMB: AAX needs urgent capital infusion to survive

CGS-CIMB: AAX needs urgent capital infusion to survive
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KUALA LUMPUR (Aug 27): As AirAsia X Bhd (AAX) has secured the indulgence of its creditors to defer all major payments, CGS-CIMB Research said the group still needs urgent capital infusion to survive.

CGS-CIMB Research analyst Raymond Yap wrote in a note that the group has been negotiating with banks for a new RM500 million loan but there appears to have been no progress, suggesting reluctance by banks especially in the absence of shareholder support.

“AAGB [AirAsia Group Bhd], at its Tuesday results conference call, said that AAX was on its own and that no support from AAGB will be forthcoming. For AAX, this is bad news,” he said.

According to him, the research house’s forecast assumes that AAX’s available seat kilometre capacity in FY20F will only be 22% of its FY19 baseline, with FY21F at 40% of the baseline, and FY22F at 50% of the baseline.

“With Malaysia’s borders likely to remain closed until 2021F, in our view, AAX will not be in a position to pay its staff salaries beyond 1Q21F, hence more drastic cost cuts will be needed in the months ahead.

“Our earnings forecasts are premised on AAX successfully securing a RM500 million bank loan, and continuing to defer a significant portion of payments to suppliers in the next 12-24 months, which may be unrealistic assumptions, but necessary for the purposes of producing forecasts on a going concern basis,” added Yap.

He reiterated a "reduce" call on AAX with an unchanged target price of zero as the roadmap for the group is highly uncertain, with recapitalisation initiatives yet to bear fruit.

“Our ‘reduce’ call is premised on the more probable outcome of AAX failing to secure the new RM500 million financing, and/or failing to secure new equity capital, which may make it the first airline casualty in Malaysia from the Covid-19 fallout.

“Upside risks include AAX potentially securing new equity funding from the Malaysian government, existing shareholders, or new investors, and new debt funding from banks, although we think these outcomes are very unlikely,” Yap noted.

To recap, AAX's net loss for the second quarter ended June 30, 2020 (2QFY20) widened to RM305.24 million from the RM207.11 million it recorded a year ago as the airline bore the full brunt of travel restrictions implemented to curb the Covid-19 pandemic, meanwhile quarterly revenue slumped to RM91.44 million compared with the RM1.01 billion reported a year earlier.

Furthermore, MIDF Investment Bank Bhd said investors most probably can expect similar financial results in the next quarter, perhaps a potential for slight positive surprise on cargo freight revenue.

“Our view is that any surprises from the segments will be too minute to have any bearings on AAX’s FY20 financial performance.

“With cash balances stood at circa ~RM250 million vs OPEX  [operating expenditure] at ~RM200 million per quarter (est.), AAX very near-term survival is at stake. Key points to observe for the 3QFY20 is the cash reserves burn rate vis-à-vis OPEX as it will [be] the litmus test for AAX’s survival, which could potentially last it only until 2H21,” said MIDF in a note today.

The research house opines that more clarity is needed with regard to AAX's secured funding options going forward as the airline tries to ride out the pandemic.

“Following its earnings announcement and after taking into account the uncertainty facing AAX and the airline industry in general, we are slashing our earnings estimates for FY20/FY21F/FY22F to core net losses of -RM2.2 billion/-RM1.16 billion/-RM0.66 billion,” MIDF noted.

MIDF said it arrived at these new estimates as it remains pessimistic on the passenger numbers going forward as people are expected to remain wary of traveling in the near future due to Covid-19.

“There are certain challenges in valuing AAX due to its negative equity value and expected strings of losses in the forecast horizon. Our theoretical approach is to value AAX using P/S multiple as we pegged the valuation to 0.01x to P/S FY20E. Following that, we are revising our target price to five sen (from 11 sen previously)

“Premised on the precedent that passengers carried are bound for a decline during a virus outbreak, we are maintaining our Trading ‘Sell’ stance. An upside risk for AAX includes a faster-than-expected recovery of the coronavirus outbreak,” said the research house.

At 10.23am, shares in AAX rose 7.69% or half a sen at seven sen, valuing the group at RM290.37 million.

Edited by Lam Jian Wyn