AirAsia Downgraded by Deutsche Bank Research from “Sell” to “Hold”

5th Jan 2017

Malaysian low-cost carrier AirAsia has been downgraded from “sell” to “hold” by the Deutsche Bank Research. According to DBR, the decision was made in view of weaker ringgit, jet fuel prices and the impact on passenger yields due to capacity growth from AirAsia’s rivals.

DBR pointed out that the weaker ringgit is a negative for the carrier, considering its US dollar expenses, debt and capital expenditure. According to the research house, 90% of LCC’s debt is in US dollars.

Deutsche Bank Research said:

We estimate that half of its 2016 operating costs (including interest expense) is in (US) dollar.

The low-cost carrier, however, claims that it has hedged 47% of its US dollar loans at 3.2348 to the ringgit for the rest of its tenure.

Another 20% of the (US) dollar loans are related to aircraft leased to associates, whose lease rentals are in dollar and hence there is some degree of natural hedge here. We have an in-house forecast of the ringgit depreciating to 4.6 to the (US) dollar by end-2017, versus 4.48 at present. A weaker ringgit has historically had an impact on the stock price.

At the same time, AirAsia’s 2018 EBIT (earnings before interest and taxes) forecast was cut 14% (28% below consensus).

The research house explained:                                                           

We now expect EBIT to decline 36% from 2016 to 2018. The reduction to the EBIT forecast has also led us to cut our valuation for the Malaysian business and this results in a target price cut of 44% for AirAsia.

Deutsche Bank Research also accentuated the rising jet fuel prices in its decision, saying:

Jet fuel expenses represent 33% of our operating expenses in 2017. Our in-house forecasts for jet fuel are US$65/US$78/US$80 per barrel over 2017 to 2019, respectively, and the spot price is US$63 per barrel. The company has hedged 74% of its jet fuel requirements in 2017 at US$60 per barrel.

AirAsia recorded a net profit in the third quarter of 2016 of RM353.89 million, while its revenue was RM1.69 billion and earnings per share were at 12.70 sen. The airline’s net profit for the first nine months of 2016, concluding with September, rose up to RM1.57 billion.

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