AirAsia well-geared for further geopolitical shocks — MIDF Research

KUALA LUMPUR (Jan 7): MIDF Amanah Investment Bank Bhd Research maintained its “Buy” call on AirAsia Group Bhd at RM1.68 with an unchanged target price of RM2.04 and said the low-cost carrier appeared to be well-geared for further geopolitical shocks.

In a note released today, the research house opined that there might be an increase in the amount of jet fuel consumed this year by AirAsia as the research house does not discount the possibility that the airline will be adding more capacity and routes in conjunction with Visit Malaysia Year 2020.

It said the group’s prudent hedging strategy means it could weather the expected rise in oil prices, as it is hedging 72.8% of Brent crude oil at US$60.22 per barrel (pb) in FY20.

“Assuming if the geopolitical tensions between the Middle East and the US prolong, pushing the Brent crude oil price up to around US$75-US$80pb, we estimate that the unhedged portion of fuel costs could decrease by 1.0% year-on-year (y-o-y) or RM3 million in FY20,” the research house said.

Meanwhile, MIDF expects AirAsia’s total fuel cost to be 13.8% higher y-o-y in FY20, which does not vary much from the percentage increase in expected jet fuel consumed of 9.5% y-o-y during the same year.

Under a situation where none of AirAsia’s fuel requirements were hedged, MIDF Research estimated the total fuel cost could increase as much as 25.7% y-o-y (assuming that Brent crude price were to hit US$75pb).

In contrast, a 100% hedge on its oil requirements would result in only a 9.4% y-o-y rise in the group’s total fuel cost in FY20.

It noted that it would be important to have a buffer in a situation where Brent crude oil price could go below the hedged amount, therefore the current hedging strategy by AirAsia serves as a tool to prevent fuel costs from inching higher.

The US airstrike last Friday (Jan 3) rattled the markets including commodities, pushing up Brent crude oil price by nearly US$3pb on that day to settle at US$68.60pb.

“An escalation of tensions in the Middle East could disrupt the flow of crude and push oil prices [up] further as both Iraq and Iran pumped more than 6.7 million barrels per day in December 2019, representing more than one-fifth of total Organization of the Petroleum Exporting Countries (OPEC) output,” the research house said.

MIDF Research noted that earnings in FY19 were below expectations, due to the accounting effect of MFRS16. It believes that AirAsia’s operations will continue to remain sound.

At 9.44am today, AirAsia shares dipped 0.6% or 1 sen to RM1.67, valuing it at RM5.58 billion.

Source: TheEdgeMarkets