AirAsia India’s disposal to reduce cash burn in short term

by NUR HANANI AZMAN / pic by BLOOMBERG

AIRASIA Group Bhd’s disposal of its 32.67% stake in AirAsia (India) Ltd will improve the low-cost carrier’s cash position, MIDF Amanah Investment Bank Bhd (MIDF Research) said in a note yesterday.

“We view this development positively as the transaction will help improve AirAsia’s dire cash position. Management disclosed that the cash proceeds will be utilised as working capital in the first quarter of 2021 (1Q21).

“The group’s cash balances stood at RM618.2 million based on its results for the third quarter ended Sept 30, 2020 (3QFY20), released in November,” it said.

Similar to closure of AirAsia Japan Co Ltd, MIDF Research said this announcement on AirAsia India is long anticipated as it was never a profitable venture to the group and non-core market for AirAsia.

With a burn rate of about RM200 million per month during the cumulative first nine months of FY20, any additional cash generated will be a boon to the group, MIDF Research said.

AirAsia had dipped 1.66% or 1.5 sen to 89 sen at close yesterday, giving the stock a market capitalisation of RM2.97 billion.

MIDF Research has downgraded AirAsia to ‘Sell’ with an unchanged target price (TP) of 68 sen, following the disposal.

“We opine that although recovery for the aviation sector and air travel is expected to gradually take place in 2021, it remains an uphill battle for the low-cost carrier.

“Given that it is struggling financially to remain afloat in the current pandemic-laden operating environment,” it added.

AirAsia Investment Ltd sold its stake in AirAsia India to Tata Sons Pte Ltd for US$37.66 million (RM152.58 million).

This brings its shareholding in AirAsia India to 16.33%.

AirAsia group president (Airlines) Bo Lingam said this transaction is in line with the initiatives towards reducing cash utilisation for the group.

“It will allow the group to use cash to grow market share in its core markets in Asean, particularly in Malaysia, Thailand, Indonesia and the Philippines, as well as future expansion into Cambodia, Myanmar and Vietnam,” he said in a statement recently.

MIDF Research also foresee that air travel demand will recover meaningfully, but only at a portion of the pre-pandemic level in FY21.

With the rollout of vaccines on the horizon, MIDF Research believes there is light at the end of the tunnel for aviation players.

“The recovery narrative can be gauged with better clarity, with governments and businesses being more adept in managing pitfalls of the virus.

“We believe punitive measures that hinder air travel will gradually be eased and potentially lifted, such as with travel bubbles between countries and universal screening for air travellers,” it added.

Meanwhile, Public Investment Bank Bhd (PublicInvest Research) is positive on the deal as it will help reduce AirAsia’s cash burn in the short term and allows it to concentrate on the recovery of its key Asean markets in Malaysia, Thailand, Indonesia and the Philippines.

Its analyst Nur Farah Syifaa Mohamad Fu’ad said the share of losses in AirAsia India over the years have resulted in the carrying value of the investment to be nil.

“With no material impact to earnings aside from a one-off gain on disposal of RM153 million, we leave our estimates unchanged.

“This disposal is expected to increase its book value per share by 13% to RM0.44,” she said in a note.

The deal is expected to be completed by end-March 2021, and the cash received will be utilised as working capital.

PublicInvest Research maintains its ‘Underperform’ call on AirAsia, with an unchanged TP of RM0.39 (1x FY21 BVPS) at this juncture, pending the completion of the proposed disposal.


Read our earlier report

AirAsia Group reduces stakes in AirAsia India