Rising crude oil prices, restricted international air travel continue to cloud AirAsia's outlook

Rising crude oil prices, restricted international air travel continue to cloud AirAsia's outlook
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KUALA LUMPUR (Oct 7): While the worst should be behind AirAsia Group Bhd, analysts and fund managers said rising crude oil prices and restricted international travel are still key challenges faced by the airline operator.

“Given that jet fuel is an airline’s largest cost component, rising fuel prices recently don’t bode well with AirAsia’s earnings recovery,” said Fortress Capital Asset Management chief executive officer Thomas Yong when contacted.

At the time of writing, Brent Crude oil was up 0.44% at US$82.92 per barrel.

Yong also noted that international air travel is still pretty much restricted and it is not expected to open up anytime soon. “This to a certain extent would affect AirAsia's future earnings given that AirAsia is stronger in international travel between its core operating countries,” he added.

And given that AirAsia is likely to only achieve pre-covid operational level sometime in late 2022, at the earliest, he opined that AirAsia's current share price of RM1.13 was overvalued.

Likewise, MIDF Research strategy head Syed Muhammed Kifni Syed Kamaruddin, who is more optimistic of the aviation industry's prospects in view of the improving pandemic situation, economic recovery and impending border reopening, also noted AirAsia's upside would be moderated by rising crude oil — and in tandem, jet fuel — prices, which are now trading at multi-year highs.

He kept his projection of a RM2.06 billion net loss for AirAsia for the financial year ended December 31, 2021 (FY21) and RM1.86 billion for FY22. “We are still of the view that its current valuation is beyond what we deem as fair hence we maintain our sell recommendation on AirAsia,” he said, as he kept AirAsia's target price at 77 sen.

Hong Leong Bank Investment Bank Research analyst Daniel Wong opined that there will still be challenges with uncertainties of the virus evolvement, effectiveness of vaccine, and cross border opening phases. “Also, there's the potential increasing competitiveness between the surviving airlines,” he added.

He is still expecting AirAsia to report net losses of RM2.3 billion for FY21, and RM1.1 billion for FY22. He also maintained his 'hold' call on AirAsia, with a TP of 90 sen.

In comparison, Public Investment Bank has the highest net loss forecast for AirAsia out of the three research houses, at RM2.77 billion for FY21, and RM1.09 billion for FY22. It also maintained its neutral call on AirAsia with an unchanged target price of 86 sen.

TA Securities analyst Tan Kam Meng, who has been calling buy on AirAsia since May, has downgraded AirAsia to sell after the stock's recent rally.

“Its future recovery is still highly uncertain, although we believe the worst is over. It is also still unclear about what we need for future air-travel, i.e. vaccine passport, quarantine, Covid-19 test on arrival,” he said.

He, who foresees a net loss of RM1.8 billion from AirAsia in FY21, has kept a TP of RM1.08 on AirAsia.

The stock closed one sen or 0.89% higher at RM1.13 on Wednesday, valuing the group at RM4.4 billion. Year to date, the counter has climbed 29.89%.

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Tan Choe Choe