AirAsia Berhad’s share was definitely one of the most talked about stock last week, with the weekly trading volume spiking up 387.8% week-on-week! Over the week, the share price fell 15.4%, wiping off RM918.4 mil. of the budget airline’s market capitalisation.

Now that the airline’s share price is at its lowest since September 2010, Macquarie Equities Research (“MER”) gave their view, via their report dated 12 June 2015, on the recent plunge in AirAsia’s share price. Similar to the Bloomberg’s consensus of 19 “buy” calls out of 25, MER maintained its Outperform call on AirAsia, albeit a reduced target price of RM3.04. Read on for the excerpts from the report titled “Catch a falling star”…

Event

The stock fell 10% on Thursday, reaching its 4-year low with 78.3M shares traded vs its three month average volume of 7.6M. Concerns of late from investors MER spoke to are on the going concern status of its Indonesian and Philippines associate and potential impairment of inter-co loans. The company's FY14 audited accounts states a RM1.2B financial assets that are past due but was not impaired. MER believes the weakness in share price provides opportunity to accumulate the stock and thus reiterate its Outperform rating.

MER believes current share price only reflects its Malaysian business + assumed impairment (RM1.75) and excludes a profitable Thai AirAsia (fair value of RM0.60). With this note, MER performed a cashflow analysis for Indonesia AirAsia (IAA) and Philippines AirAsia (PAA) and conclude the following investment positives that should help its cashflows: 1) lower fuel price, 2) network optimisation with no additional new aircraft, 3) pre-IPO exercise for IAA where the cash raised could be used to pay inter-co loan from AirAsia and 4) cost savings from retirement of older fleet at PAA

Impact

The facts. In its FY14 FS audited by PricewaterhouseCoopers, financial assets that are past due but not impaired amount to RM1.2bn (RM0.45/sh). No impairment was made as management is of the view that these amounts are recoverable. Thus in the extreme scenario of a liquidation MER estimates a fair equity value of RM1.19 based on FY14A book value.

Is it recoverable? While lower fuel price are tailwinds for IAA and PAA, MER estimates cash from operations are insufficient to reduce interco loans in FY15 (refer to Figs 2 & 5). Cash from a potential pre-IPO exercise for IAA and sale of aircraft for PAA as highlighted by management are crucial for the two companies in FY15 to raise cash.

Earnings and target price revision

MER is lowering its FY15-17 EPS estimates by -5.5% to -2.8% incorporating the lower yields seen in 1Q15. Its SOP TP is reduced to RM3.04 from RM3.26 mainly from reducing Indonesia AirAsia FV.

Price catalyst

• 12-month price target: RM3.04 based on a Sum of Parts methodology.
• Catalyst: Clarity on action plans to recover inter-co loans, assets monetisation

Action and recommendation

• Reiterate Outperform.

Source: Macquarie Research - 15 Jun 2015