AirAsia downgraded by CIMB amid earnings pressure, higher oil prices

Malaysia ringgit notesMalaysia ringgit notes

CIMB downgraded AirAsia to Hold from Add, pointing to higher oil prices and foreign-exchange pressure in its Indonesian and Philippine units.

“We think that higher oil prices are likely for the foreseeable future, with OPEC’s supply discipline, U.S. production bottlenecks and a likely resumption of Iran sanctions,” CIMB said in a note on Monday. It added that the carrier has a “light fuel hedging book” of only about 12 percent of its jet fuel requirements, spurring earnings forecast cuts.

CIMB raised its jet fuel price assumption to US$85 a barrel from US$75 for all forecast years, spurring it to cut core net profit forecasts for 2018-20 by 21-35 percent. It added that there were downside risks to those forecasts.

The U.S. dollar has also appreciated against Indonesia’s rupiah and the Philippine peso, it noted.

“More upside for the U.S. dollar is possible against these two currencies due to the impact of higher oil prices on their economies,” it said. “The depreciation of these currencies, on top of higher oil prices, is expected to drive IAA and PAA back into the red for 2018F, although both airlines delivered profits in 2017.”

CIMB cut its AirAsia target to 3.84 ringgit from 5.31 ringgit.

AirAsia shares fell sharply on Monday, the first day the market traded after Malaysia’s shock election outcome ended the former ruling party’s 61 years in power. The stock’s tumble to end down around 5 percent on Monday followed AirAsia’s chief Tony Fernandes appearing to back the now-former Prime Minister Najib Razak.

The stock was up 0.86 percent at 3.53 ringgit at 12:29 P.M. SGT on Tuesday.