Earnings still premature for AirAsia Digital

The digital initiatives will take a couple of years to bear fruit, analyst says


AIRASIA Group Bhd’s move at raising capital to fund its digital arm AirAsia Digital to diversify its revenue stream for the group is not expected to boost earnings in the short horizon, analysts observed.

This comes after group CEO Tan Sri Dr Tony Fernandes recently said AirAsia Digital is the group’s “next phase” and aims to be a new kind of travel technology company in the region through the strength of its assets and access to talents.

“Despite the aggressive marketing of its digital platform, at this juncture, it is still premature to estimate any earnings contribution from this segment as the businesses are still loss-making and small relative to the overall group.

“Regardless, we look upon this development favourably as it demonstrates (AirAsia) management’s continued entrepreneurial drive, innovative spirit and prudence amid the pandemic that ravages the aviation industry,” MIDF Amanah Investment Bank Bhd (MIDF Research) said in a note last Friday.

The research firm noted that the low-cost carrier still maintains its traditional segment, which consists of air operator’s certificate and other airlines, food and beverage (F&B), engineering and ground handling.

“This digital move reaffirms (AirAsia) management’s determination in diversifying its core earnings away from the traditional airline business model while retaining its competitive edge and know-how in the tourism business,” MIDF Research said.

Previously known as RedBeat Ventures Sdn Bhd upon launch in 2018, AirAsia Digital leverages the group’s physical and digital assets to create an ecosystem of businesses that connect with its customers in their everyday life.

It comprises three main pillars — venture builder, RedBeat Academy and data centre. Venture builder is dedicated to incubating and growing strategic businesses that focus on logistics, e-commerce and financial services.

It includes its five portfolio companies AirAsia.com, Teleport, BigPay, BIGLIFE and Santan.

Funding details are scant.

“So far, the management only indicated on new debt capital for Teleport and Santan to be announced later. Teleport provides logistics services and Santan is its F&B business,” MIDF Research added.

Unfortunately for AirAsia and other aviation players, the Covid-19 pandemic is still looming large and continues to be a threat to the safety and economic wellbeing.

In Malaysia and elsewhere, the number of cases are spiking again with the potential to spread out as restrictions are relaxed.

In AirAsia’s other key markets such as Indonesia and the Philippines, the number of new cases daily is still in the thousands except in Thailand, the research firm noted.

While details on the potential contribution from AirAsia Digital remain scarce, MIDF Research opined that the digital initiatives will take a couple of years to bear fruit.

Moving forward, it expects AirAsia will continue to operate in a challenging environment amid persistent pandemic development, border control and other measures that remain unconducive for airline business to operate in.

“We maintain our financial years 2020 (FY20) and FY21 earnings estimate, while maintaining positive earnings estimate for the FY22,” the research firm said.

MIDF Research’s target price for AirAsia is 40 sen with a ‘Trading Sell’ call due to the uncertainty of how the “new norm” will alter consumer demand for air travel even post Covid-19.

“We believe there may be a possibility of shrinking market size due to the regional economic contraction. Operationally, there is small evidence of a potential recovery. Despite this, we believe the odds are stacked against AirAsia and we are not convinced yet on the recovery narrative,” the research firm said. AirAsia closed two sen higher at 67 sen last Friday.