This article first appeared in The Edge Malaysia Weekly on July 13, 2020 - July 19, 2020

EXTERNAL auditors for AirAsia Group Bhd revealed last week the dire state of the low-cost carrier’s finances when they flagged that in 2019, before the Covid-19 pandemic took hold, AirAsia already had a negative working capital as its current liabilities exceeded its current assets by RM1.84 billion.

In AirAsia’s audited annual accounts for the financial year ended Dec 31, 2019 (FY2019), Ernst & Young (EY) cast doubt over the carrier’s ability to continue as a going concern in view of the current economic condition and the pandemic. The financials also revealed that the carrier booked a net loss of RM283.22 million compared with a net profit of RM1.7 billion in FY2018.

EY’s warning came as AirAsia reported its biggest ever quarterly net loss of RM803.85 million on revenue of RM2.31 billion for the first quarter ended March 31, 2020 (1QFY2020), owing to fewer passengers carried and fuel hedging losses. As a consequence, the carrier’s net current liabilities widened to RM3.57 billion as at end-March 2020 from RM1.84 billion as at end-December 2019. But the worst is not over. Analysts are expecting the 2QFY2020 results to be worse given the almost zero revenues as AirAsia’s planes were largely grounded by the pandemic during the period.

Its net cash position had also halved to RM1.04 billion as at end-March 2020 from RM2.1 billion as at end-2019. CGS-CIMB Research analyst Raymond Yap estimates that AirAsia needs RM3 billion in new funding to maintain a healthy cash position. The race to raise funds has never been more urgent.

Since then, AirAsia co-founder and group CEO Tan Sri Tony Fernandes has moved swiftly to assuage investors’ concerns over the carrier’s cash flow and negative working capital, saying that it is raising additional cash to help keep itself afloat through a combination of debt and equity financing. The flamboyant entrepreneur was reported by Nikkei Asian Review as saying that the carrier was looking to raise up to RM2 billion of additional funds in the next six months and return to profitability by 2021.

AirAsia, in its FY2019 financial statement, says negotiations are underway with financial institutions in Malaysia for loans of up to RM1 billion, of which 80% may be guaranteed by Danajamin Nasional Bhd, CGS-CIMB Research’s Yap estimates.

It is also depending on its subsidiaries in the Philippines and Indonesia to do their part to help shore up funding. Last Thursday, India’s Business Standard reported that Indian conglomerate Tata Sons was in talks to buy out AirAsia’s 49% stake in AirAsia India at a steep discount.

A check with CTOS data shows that AirAsia Bhd, AirAsia’s airline operation arm, has loans with RHB Bank Bhd, Wilmington Trust SP Services (Dublin) Ltd and M&T Aviation Finance (Ireland) Ltd, among others, that had not been settled as at July 7.

Private placement versus rights issue

Apart from debt financing, AirAsia has announced plans to raise capital of up to RM1.4 billion to strengthen its equity base and liquidity. While analysts are concerned that a rights issue or private placement could be highly dilutive to existing shareholders given the depressed share price, they say an equity issue is necessary for the carrier.

Most say a private placement is likely to be the preferred route for AirAsia. The carrier was already reported to be in talks with SK Corp to sell a 10% stake to the South Korean chaebol through a private placement.

An investment banker, however, points out that EY’s warning about AirAsia’s ability to continue as a going concern and the release of weak 1QFY2020 results have led to a fall in AirAsia’s share price and the ongoing talks may suffer a setback. When the news broke last month, it was said that the private placement would be issued at a price of RM1 apiece, which would see SK Corp forking out around RM334 million. At the time, AirAsia shares were trading at 82.5 sen.

“I don’t think the deal will go through at that price (RM1 a share) looking at how much the stock has dropped and is currently trading at,” he tells The Edge.

An analyst at a foreign house concurs, noting that a 10% placement would raise proceeds of only RM250 million based on the stock’s closing price of 75 sen last Thursday.

Last Tuesday, AirAsia saw its share price fall 4% after it released its 1QFY2020 financial results. EY’s audit opinion sent the counter down further by 17% to 71 sen the following day. The stock pared some of its losses on Thursday to close at 75 sen, giving the company a market capitalisation of RM2.51 billion. However, AirAsia has lost RM3.17 billion in value since the beginning of the year as investors shy away from airline stocks hit hard by the Covid-19 pandemic.

The investment banker says alternatively, the carrier could consider raising more funds through a rights issue, which would be offered to all shareholders in the company. However, he concedes that existing shareholders may not be willing to subscribe, given the depressed share price and continuing uncertainty in the air travel industry.

He cites the recent S$8.8 billion (about RM27 billion) rights exercise by Singapore Airlines Ltd (SIA). “Most directors of SIA had reportedly chosen to let their rights mandatory convertible bonds (MCBs) lapse without exercising them. This says something about the current levels of confidence in the industry.

“Thus, in AirAsia’s case, if it goes ahead with a potential rights issue, it is imperative for Fernandes and the other substantial shareholders to underwrite a substantial portion of the offering. If they do so and price it at a big discount [to the market price] that is sweetened by free warrants, I am sure the take-up will be good.”

PublicInvest Research analyst Nur Farah Syifaa’ Mohamad Fu’ad notes that any proposal for a rights issue, however, will require an extraordinary general meeting to gain shareholder approval. “[As such,] we understand that a rights issue may not be the favoured option at this juncture,” she wrote in a report last Friday after meeting with the management of AirAsia.

Analysts say AirAsia will survive

Most analysts believe AirAsia will be able to navigate the Covid-19 crisis. To ensure sufficient working capital to sustain the business operations, AirAsia has sought payment deferrals from its suppliers and lenders, and restructured 70% of its fuel hedges as at July 6. It has also resorted to salary cuts, reduced employees and fleet, and deferred delivery of new aircraft. AirAsia says it hopes to halve cash expenses this year.

Affin Hwang Capital Research says AirAsia’s proactive cost management and cash preservation initiatives, as well as its plan to raise funds by way of placement and/or rights issues, should help it to weather the downturn. It now projects AirAsia will post a wider core net loss of RM1.9 billion in FY2020, from RM1.18 billion previously.

“Taking AirAsia’s assurances at face value, we are reasonably confident that it will survive Covid-19 as the new RM1 billion loan to Malaysia AirAsia, possible new loans to [its subsidiaries in] Indonesia and the Philippines, and potential RM1.4 billion new equity issue by AirAsia will bring the total capital raising close to the RM3 billion we estimate is needed [for it] to keep afloat,” says CGS-CIMB Research’s Yap in a July 8 report.

KAF Equities analyst Max Koh notes that AirAsia’s management expects a better third quarter as it operates more flights. “Malaysia AirAsia is looking to resume international flights this month with an estimated load factor of 75%, while Thai AirAsia is expected to see 60% load factor. Besides that, management expects to see positive cash flow from July onwards,” he says in a July 6 report. However, a second Covid-19 wave is a key risk.

Nomura Global Markets Research transport analyst Ahmad Maghfur Usman highlights that as a result of the hedging losses dragged by the cash flow hedge reserve, there was a total net derivative financial instrument liability of RM1.17 billion (with RM982 million related to oil) as at end-1QFY2020 in AirAsia’s balance sheet. If oil prices continue to decline, the paper losses on these instruments would turn to realised value, and would eventually need to be settled.

“Consequently, we believe this could lead to imminent fundraising in the near term, not only for AirAsia to outlive the Covid-19 pandemic but also to settle outstanding dues from oil hedges,” he says in a July 7 report.

Of the 20 analysts tracking the stock, 14 have a “sell” rating while the rest recommend a “hold”. The average target price is 68 sen.

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