CIMB Research retains reduce call on AirAsia Group

AirAsia Group is partially shielded by hedges covering 52% of its oil needs in FY19F with an effective exercise price of c.US$78 of jet fuel and 40% of its oil needs in FY20F at US$60 Brent

KUALA LUMPUR: CIMB Equities Research is maintaining its reduce call on AirAsia Group as oil prices continue to move higher and forecast dividends from the Castlelake transaction may be lower than thought.
 
In its research note issued on Monday, it expects FY19F net gearing to hit 145% of equity upon the capitalisation of operating leases, with MFRS 16 effective since Jan 1, 2019.

“Target price cut to RM1.50 on lower core EPS forecasts (unchanged CY20F P/E of 10 times) and including expected dividends of 13 sen,” it said.

CIMB Research pointed out spot jet fuel prices have traded up to US$80 a barrel recently, exceeding its assumption of US$75 for FY19F. 

This is on the back of very strong determination by Saudi Arabia to cut its oil production in excess of its commitments to cut under the OPEC+ deal that took effect on Jan 1, 2019, continued declines in Venezuelan oil production due to ongoing US sanctions as well as the upcoming expiry on May 2 of the waivers granted by the US to eight countries to continue importing Iranian oil since November 2018. 

The upcoming Jan 1, 2020 implementation of the low-sulphur limits for marine fuels under the IMO 2020 rules may also cause a rise in jet fuel crack spreads, impacting airlines, the research house said. 

In its base case estimate, the International Energy Agency expects diesel prices to rise by 20% in CY20F or up to 100% assuming strict enforcement of IMO 2020, against the research house’s assumption of 13% increase to US$85 for jet fuel. 

“AirAsia Group is partially shielded by hedges covering 52% of its oil needs in FY19F with an effective exercise price of c.US$78 of jet fuel and 40% of its oil needs in FY20F at US$60 Brent,” it said. 

CIMB Research also said AirAsia Group sold 79 aircraft to lessor BBAM during 2018 and is expected to sell a further 25 planes to lessor Castlelake by 3Q19F. 

“Given this, together with other existing operating lease aircraft, AirAsia Group is expected to capitalise RM11.8bn worth of borrowings related to the above operating leases in FY19F, effectively bringing back to the balance sheet what had previously been off-balance sheet. 

“The impact would be to raise reported gross gearing of 19% in FY18 to 198% on a proforma basis after MFRS 16. 

“The overall impact to P&L earnings from the above sale and leasebacks (S&LB) is negative because AirAsia Group would have to pay for the lessors’ profit margin as well as provide for a higher level of maintenance charges based on lessors’ conditions for lease returns, which tend to be strict. The net result would be a squeeze on AirAsia Group’s profit margins,” it said.