AmInvestment downgrades AirAsia Group on costlier fuel

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KUALA LUMPUR (Sept 17): AmInvestment Bank Bhd said today it had cut its AirAsia Group Bhd net profit forecast by 40%, 30% and 29% respectively for financial years ending Dec 31, 2019 (FY19), FY20 and FY21 respectively to reflect the budget airline's high aircraft maintenance provisions under the lease model and after taking into account higher jet fuel price assumptions.

In a note today, AmInvestment, which also cut its AirAsia Group share fair value (FV) to RM1.45 from RM2.07, said the higher jet fuel price assumption follows the surge in crude oil prices after the attack on Saudi Arabia's oil facilities over the weekend.

"We raise our average jet fuel price in FY20F to US$92/bbl from US$87/bbl, while maintaining assumptions of US$79/bbl in FY19F (as fuel cost has been largely locked in) and FY21F (assuming damaged capacity in Saudi Arabia is to be gradually restored). We also take into consideration AirAsia Group having hedged forward 65%, 73% and 19% of its fuel requirements (Brent crude) in FY19, FY20F and FY21F at US$63.31/bbl, US$60.22/bbl and US$59.45/bbl respectively. For every US$1 change in our jet fuel price assumption, AirAsia Group's FY20F earnings will deviate by 2%.

"The positive outlook for Malaysia's tourist arrivals (ahead of the Visit Malaysia Year 2020) will serve as a tailwind to AirAsia Group's key strategy to aggressively grow its top line. However, this will be eroded by AirAsia Group's higher cost structure arising from its planes that are now largely leased vs. owned previously, coupled with an elevated earnings risk on sustained high crude oil prices (at least over the next 6-12 months) with increased geopolitical risk in the Middle East," AmInvestment said.

Yesterday, AirAsia Group chief executive officer Tan Sri Tony Fernandes said the company is hedging at US$60 a barrel against higher crude oil prices for the airline's fuel requirements.

Fernandes said via Twitter that AirAsia Group has hedged 75% of its fuel requirements next year at the price. "Good that we hedged crude (oil) at US$60," he said.

Today, Reuters reported that Brent crude was down 77 cents, or 1.1%, at US$68.25 a barrel by 0051 GMT, while West Texas Intermediate was down 82 cents, or 1.3%, at US$62.08 a barrel.

AmInvestment said it had cut its AirAsia Group share FV to RM1.45 from RM2.07 based on a price/earnings (P/E) ratio of eight times revised FY20F EPS.

"At eight times, we value AirAsia Group at a discount to an average forward P/E of 11 times of global peers Ryanair and Southwest Airlines to reflect AirAsia Group's relatively smaller market capitalisation. Downgrade our call to SELL from HOLD," AmInvestment said

At Bursa Malaysia today, AirAsia Group's share price fell four sen or 2.21% to RM1.77 at 10:25am. The stock saw 4.36 million shares traded.