Cover Story: Fear of losing Fernandes outstrips that of coronavirus for AirAsia investors

This article first appeared in The Edge Malaysia Weekly, on February 10, 2020 - February 16, 2020.
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IT is just the second month of the year and the world is already reeling from the raging wildfires in Australia, the death of basketball legend Kobe Bryant and the Wuhan novel coronavirus epidemic.

The coronavirus outbreak is said to be one of the biggest viral epidemics of the new millennium, alongside the Severe Acute Respiratory Syndrome in 2005/06 and the H1N1 in 2009. To date, the death toll from the coronavirus epidemic has exceeded 600.

The epidemic has almost crippled air travel in Asia, especially to and from China. Singapore, Indonesia and South Korea are some of the countries that have imposed some level of restrictions on air travel and travellers from China.

The viral outbreak is bad news for airlines, which have to stop flights into and out of China, and this has caused their stocks to be battered.

A comparison of Asian airline stocks shows that Singapore Airlines Ltd has lost more than 5% of its share price so far this year while Thai Airways International PCL lost 18.8% of its market value in the same period.

AirAsia Group Bhd and AirAsia X Bhd (AAX) are the biggest losers so far among Asian airlines, due to the double whammy of the coronavirus and their top executives being embroiled in bribery allegations involving European aircraft maker Airbus SE.

AirAsia’s stock has lost 22.9% of its market value while its long-haul arm has suffered a 16% drop in its share price up to Feb 7.

Even Hong Kong-based Cathay Pacific Ltd, probably the largest international airline most affected by the coronavirus outbreak, suffered less than AirAsia and AAX in terms of share price changes. The airline, which recently announced no-pay leave of three weeks for all 27,000 of its staff, lost 10.2% of its value as at Feb 7.

AirAsia’s share price plunged more than 19% within just three trading days — from Jan 31 to Feb 4 — to RM1.15 per share, after news broke on Feb 1 that its sole aircraft supplier, Airbus, has agreed to settle with the UK’s Serious Fraud Office (SFO) over a corruption investigation.

Last Tuesday, its co-founder and group CEO Tan Sri Tony Fernandes and co-founder and executive chairman Datuk Kamarudin Meranun, allegedly being AirAsia Executive 1 and 2 named in the SFO report against Airbus, announced that they were stepping down from their respective official posts for two months to allow the Malaysian authorities to conduct investigations into the allegations. Both have denied the allegations.

The plunge in AirAsia’s share price within three days after the news broke suggests that the market is more concerned about the outcome of the inquiries launched by three Malaysian authorities, namely the Malaysian Anti-Corruption Commission (MACC), the Securities Commission (SC) and the Malaysian Aviation Commission (Mavcom).

MACC chief commissioner Latheefa Koya said last Saturday that the commission is investigating the allegations while the SC said it is looking from the angle of any breach of securities laws by the executives. Mavcom said last Monday that it is assessing whether there is any contravention of the Malaysian Aviation Commission Act 2015 (Act 771) and the commission’s Guidelines on Fit and Proper Person pertaining to the judgment by the UK court on the graft allegations.

Nevertheless, remarks by Prime Minister Tun Dr Mahathir Mohamad last Thursday that an “offset” is not a bribe if the money goes to the company, rather than to individuals, sent AirAsia’s share price higher by seven sen, or 6%, to close at RM1.23 on that day. AAX, which hit a low of 11.5 sen last Tuesday, has also seen a rebound — but before the comment was made by the prime minister — to settle at 13 sen on Thursday.

The Prime Minister’s Office has since ­clarified that at no point did Mahathir suggest that the alleged bribery involving AirAsia was an offset payment.

Most analysts are holding back from valuing the impact of the allegations just yet. An analyst The Edge spoke to believes that Fernandes and Kamarudin will be cleared by the authorities and the market will adjust the valuations of the airlines.

“The bottom line is, the dust will settle ... let the market figure it out,” he says.

While investigations into the allegations are ongoing, the coronavirus outbreak has yet to subside. There have been cases of patients having recovered, but the virus is still spreading.

AirAsia, the largest low-cost airline in Asia, has large exposure to the Chinese market. While it does not provide a breakdown of seat capacity to specific markets, AAX says it has a 55% market share of the Malaysia-China sector.

Another analyst estimates at least 30% of the seat capacity of AirAsia Thai and AirAsia X Malaysia is for the Chinese market.

AirAsia X Thai, meanwhile, may have an exposure of up to 40% of its seat capacity to the Chinese market, the analyst adds.

AirAsia Malaysia, the largest airline operating company of the group, is estimated to have 5% of its seat capacity for the Chinese market.

In 2018, AirAsia Malaysia carried 32.3 million passengers and AirAsia Thai, 21.6 million. AirAsia X carried 8.59 million passengers across its three operating subsidiaries in 2018.

(Note that AirAsia X Indonesia has been shut down.)

With such high exposure to the Chinese market, what will be the outlook for AirAsia and AAX?

In a Feb 3 report, PublicInvest Research analyst Nur Farah Syifaa’ Mohamad Fu’ad states that the coronavirus outbreak has little impact on earnings of the airlines at the moment. However, there is a downside risk to the earnings should the situation persist.

“We are conservatively cutting our passenger growth assumptions by 5% and 25% for AirAsia and AAX respectively, resulting in earnings adjustments of between 61% and more than 100% for both airlines. We caution for further downside risks should this situation prolong,” she says.

Nomura Research, in a Jan 29 report, notes that Thailand’s aviation market will be the most severely hit by the epidemic, due to its dependence on Chinese tourists.

“From a China outbound perspective as a country, we see Thailand aviation names in our coverage, such as Airports of Thailand and Asia Aviation, to be most severely hit, given the exposure to China tourism, which accounts for 24% of Thailand’s total tourist arrivals,” the research firm says.

A 5% drop in passenger traffic for AirAsia will result in a 65% drop in earnings in FY2020, says Nomura Research. It forecasts a net profit of RM151 million for AirAsia this year if there is a 5% drop in passenger traffic, compared with a base-case scenario forecast of RM434 million in earnings.


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