Challenges seen for AirAsia due to leased aircraft, high fuel cost

This article first appeared in The Edge Financial Daily, on September 18, 2019.
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AirAsia Group Bhd
(Sept 17, RM1.79)
Downgrade to sell with a lower fair value (FV) of RM1.45:
We cut our financial year ending Dec 31, 2019 (FY19), FY20F and FY21F net profit forecasts by 40%, 30% and 29% respectively.

This is to better reflect AirAsia Group Bhd’s high aircraft maintenance provisions under the leased aircraft model (versus the owned aircraft model previously).

We are also factoring in higher jet fuel price assumption for FY20 following the surge in crude oil prices after Saudi Arabia’s oil facilities suffered drone attacks over the weekend.

We cut our FV by 30% to RM1.45 (from RM2.07) based on eight times revised FY20 earnings per share (EPS).

At eight times, we value AirAsia at a discount to an average forward price-earnings of 11 times of global peers Ryanair and Southwest Airlines to reflect AirAsia’s relatively smaller market capitalisation.

We raise our average jet fuel price in FY20 to US$92 (RM384.56) per barrel (bbl) from US$87 per bbl, while maintaining assumptions of US$79/bbl in FY19 (as fuel cost has been largely locked in) and FY21 (assuming damaged capacity in Saudi Arabia is to be gradually restored).

We also take into consideration AirAsia having to hedge forward 65%, 73% and 19% of its fuel requirements (Brent crude) in FY19, FY20 and FY21 at US$63.31/bbl, US$60.22/bbl and US$59.45/bbl respectively.

For every US$1 change in our jet fuel price assumption, AirAsia’s FY20 earnings will deviate by 2%.

The positive outlook for Malaysia’s tourist arrivals (ahead of the Visit Malaysia Year 2020) will serve as a tailwind to AirAsia’s key strategy to aggressively grow its top line.

However, this will be eroded by AirAsia’s higher cost structure arising from its planes that are now largely leased versus owned previously, coupled with an elevated earnings risk on sustained high crude oil prices (at least over the next six to 12 months) with increased geopolitical risk in the Middle East. — AmInvestment Bank, Sept 17