Reduced gearing for AirAsia

15 July 2009

Move to part-defer taking delivery of aircraft in 2010 should lower debt obligations

PETALING JAYA: AirAsia Bhd’s decision to defer taking delivery of eight Airbus A320 aircraft next year is expected to bring its gearing level down, say analysts.

AmResearch views the development positively, saying AirAsia would manage to avoid building up significant capital and finance costs in its books over a soft phase in passenger demand cycle.

The research house said the move would also lift the market’s previous concerns on AirAsia’s aggressive expansion plan amid a weak demand environment, which could have resulted in a mismatch between slowing earnings growth and escalating costs.

“Assuming the deferral were to materialise, we will lower our net gearing forecast to 2.7 times from 3.1 times in 2010 and 2.8 times from 3.6 times in 2011 – extending out the gearing up cycle over AirAsia’s growth phase.

“Due to earlier assumptions of poor load factors, the elimination of depreciation and finance charges actually raise our net profit forecast by 9% to 16% to RM537mil in financial year ending Dec 31, 2010,” AmResearch said.

On Monday, AirAsia said it was planning to defer taking delivery of eight A320s for 2010 and may defer taking delivery of another eight aircraft in 2011.

The low-cost carrier was originally scheduled to take delivery of 24 aircraft next year and another 24 in 2011.

OSK Research analyst Ng Sem Guan said the deferment could help the airline lower its “relatively high” gearing level.

“Although AirAsia announced a proposed private placement recently, its gearing remains a concern,” he said, adding that the deferment reflected the less-than-exciting outlook for the carrier.

“We think the deferment suggests that the outlook for the carrier is tougher than expected. The rebound in crude oil price and the fact that the company has unwound all its fuel hedge positions may pressure operating costs. This prompts us to revise downwards our FY10 earnings by 15.5%,” he said.

However, Ng said AirAsia’s on-going fund raising exercise might provide some excitement for its share price performance.

ECM Libra Investment Research said although the deferment of delivery of the eight aircraft next year might cap earnings for 2010, it would help lighten the the group’s debt obligations.

“AirAsia’s gearing level is expected to be five times in FY10. However, the deferment of the aircraft delivery will reduce it a little to a gearing level of about 4.3 times. We also expect its cash balances to improve in FY10 as a result,” it said.

The research house said it was less concerned about the earnings opportunity cost and was more positive about the effects the deferment would have on AirAsia’s balance sheet.