No meaningful recovery yet for aviation

Hong Leong Investment Bank’s (HLIB) researc arm is maintaining its “sell” calls on both AirAsia Group Bhd and Malaysia Airports Holdings Bhd (MAHB).

PETALING JAYA: It’s not yet light at the end of the tunnel for the aviation sector as it continues to undergo turbulence amid closed country borders and social distance measures.

“We expect a prolonged impact of Covid-19, especially on international travel, affecting the profits and margins of the sector, ” Hong Leong Investment Bank’s (HLIB) research arm told clients in a report yesterday.

It said based on current developments, it expected domestic travel within Asean countries to remain suppressed until end of 2021 and only gradually recover by mid-2022 with international borders opening up at the same time.

A “meaningful” recovery could only happen towards end-2022/mid-2023, it added.

The research house is maintaining its “sell” calls on both AirAsia Group Bhd and Malaysia Airports Holdings Bhd (MAHB).

In its report, it said while it was positive on AirAsia’s progress in the development of AirAsia Digital Sdn Bhd and the potential listing of the unit on the United States stock exchange, it reckoned its aviation segment was still in a dire situation.

“We remain concerned on the current negative equity position and the proposed cash call exercise, while there is still on-going uncertainty on Covid-19 as well as the ‘new normal’ affecting the government’s decision to allow air travel within its geographical operations, ” HLIB said.

Earlier this week, AirAsia said it had proposed to undertake a renounceable rights issue of up to RM1.024bil in nominal value of seven-year redeemable convertible unsecured Islamic debt securities with a nominal value of RM0.75 each.

The cash call exercise is expected to raise gross proceeds of between RM615.9mil and RM1.024bil and will be used for fuel hedging settlement, aircraft lease and maintenance payments, general working capital and for AirAsia Digital’s business units.

The budget airline said the proposed rights issue was undertaken in response to a series of unexpected events outside the group’s control, primarily due to the outbreak of the global pandemic which had created significant challenges for the airline industry.

“We maintain our sell recommendation on AirAsia with an unchanged target price of 56 sen, ” said HLIB.

On MAHB, it said the airport operator was expected to remain in the red in the near-term, as the recovery of air travel (especially in Malaysia) remained a concern.

“We maintain a sell recommendation with an unchanged target price of RM4.88, ” it said.It noted that Asia-Pacific governments in general had a lower risk tolerance compared to US and Europe, hence it is not anticipating a smooth recovery for international air travel here, in the near term.

“With the lower international travel mix, airport operators will lose out as international travels command higher spending power and provide higher margins.”