This article first appeared in The Edge Financial Daily on November 26, 2018

KUALA LUMPUR: Is long-haul budget carrier AirAsia X Bhd (AAX) in need of a cash infusion? The jury is still out as aviation analysts appear divided.

Two analysts The Edge Financial Daily contacted said a cash call is urgently required, while two others maintained the airline’s cash pile of RM266 million as at end-September is sufficient as they expect the operating environment to ease on the back of lower jet fuel prices.

Moreover, the airline does not appear to have major capital expenditure (capex) on the horizon. This compared with a cash balance of RM433 million as at Dec 31, 2017.

AAX chief executive officer for Malaysia Benyamin Ismail did not respond to a request by the newspaper seeking comments on the matter.

Nomura Research analyst Ahmad Maghfur Usman is optimistic AAX will not face cash flow constraints because it has no capex needs, thanks to its sale-and-leaseback model in fleet management.

“AAX is buying aircraft from Airbus at a very attractive price, so it can sell them at attractive prices to a lessor, and then lease them back at very attractive operating lease rates,” he said of AAX’s fleet of 32 aircraft as at end-October. The group aims to add another four aircraft by year end.

Ahmad Maghfur does not foresee a need for a cash call in the near term as he expects AAX’s cash position to recover as oil prices continue to come under pressure.

“It (AAX’s cash pile) will recover because oil prices are very low now; there is room for earnings improvement,” he said. Thai AirAsia X’s “decent performance” also prompted Nomura’s buy call on the stock.

Ahmad Maghfur is currently the only analyst that rates AAX a “buy”, with a target price of 29 sen compared with its closing price last Friday of 22.5 sen, which values the airline at RM933 million.

Others are less bullish as according to Bloomberg’s consensus, there are four “sell” and six “hold” calls, with target prices ranging from 12 sen to 39 sen (the latter by Macquarie which has a neutral call).

Year to date, the counter has depreciated by nearly a third from 33 sen.

Another analyst, who declined to be named, believes the cash balance depletion at AAX is only temporary.

“So far in the fourth quarter of 2018 (4Q18), the Brent crude oil price has dropped by approximately 26% to hover around US$60-US$65 (RM251.40-RM272.35) per barrel in contrast to the 7.4% rise in 3Q18. We believe that jet fuel prices will follow suit and AAX will be able to benefit by hedging more moving forward.

“Tracing back to the third quarter ended Sept 30, 2015 (3QFY15), the airline experienced a net loss of RM288.2 million before recording a profit of RM201.6 million for 4QFY15. The main reason for the recovery was the 12.9% decline in the average Brent crude oil price — from US$51.29 per barrel to US$44.59 per barrel.

“Hence, we do not discount the possibility of this occurring again,” he said.

But, he said, there is no harm in making a cash call to give strong support to the group’s ongoing route rationalisation and capacity management exercises.

On the other hand, Maybank IB Research analyst Mohshin Aziz believes a fundraising exercise such as a rights issue may be necessary to restore the group’s “downtrending” cash balances to a “comfortable” level.

“If you look at their balance sheet, they are living on [that the] future revenue. It is fine provided future outlook is strong, but demand for long-haul low-cost flights hasn’t been strong lately. I am afraid they don’t have a choice; they need a cash call in order for them to have a comfortable level of cash pile.

“Air traffic to and from China has been very weak since July. India’s has been subdued since August this year,” he maintained.

Even more adamant on the need for a cash call is CIMB Research analyst Raymond Yap.

In his note to investors last Thursday, he asserted a capital-raising exercise will be vital to AAX, particularly with continued strength in jet fuel prices and potential demand pressures once the new aviation levy and higher airport taxes are imposed from mid-2019 onwards.

Yap is convinced more cash is needed even if AAX Malaysia conducts a sale-and-leaseback of its aircraft. Indeed, he anticipates four of the carrier’s seven aircraft will be put on sale-and-leaseback in 2019 to potentially free up US$235 million in cash proceeds even though it will pay about US$508,000 per month in leasing charges.

“AAX needs the cash to survive the tough operating environment,” he said.