CIMB IB Research expects higher operating costs, gearing levels for AirAsia till 2021

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KUALA LUMPUR (April 8): CIMB Investment Bank Research (CIMB IB Research) has retained its "reduce" call on AirAsia Group Bhd as it forecasted the company to face higher operating costs and gearing levels until 2021.

The research house lowered its target price for AirAsia to RM1.50, from RM1.82 previously, as it expects lower core earnings per share and dividend of 13 sen.

At 11.00am, AirAsia was trading down 1 sen or 0.38% at RM2.64 with 1.55 million shares transacted. Its market capitalisation stood at RM8.86 billion.

In a note today, CIMB IB Research analyst Raymond Yap pointed out that AirAsia had sold 79 aircraft to lessor BBAM Ltd Partnership in 2018 and is expected to sell a further 25 planes to lessor Castlelake LP by the third quarter of this year.

Given this, Yap explained that together with other existing operating lease aircraft, AirAsia is expected to capitalise RM11.8 billion worth of borrowings related to the operating leases in financial year 2019, effectively bringing back to the balance sheet what had previously been off-balance sheet.

"The impact would be to raise reported gross gearing of 19% in FY18 to 198% on a pro forma basis after MFRS 16.

"The overall impact to P&L (profit and loss) earnings from the above sale and leasebacks (S&LB) is negative because AirAsia would have to pay for the lessors' profit margin as well as provide for a higher level of maintenance charges based on lessors' conditions for lease returns, which tend to be strict. The net result would be a squeeze on AirAsia's profit margins," he said.

Yap added that with the squeeze in profitability, AirAsia will experience greater operating leverage from unexpected changes in fuel prices, exchange rates, competitive dynamics, and airport taxes and levies.