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What’s the outlook for AirAsia after RM953 million Q1 loss?

Malaysian budget airline AirAsia Group on Monday 06 July 2020 reported a net loss of 953 million Malaysian ringgit (S$310.5 million) for the quarter ended 31 March 2020. This is a reverse from the 102 million ringgit (S$332 million) in net profit recorded in the same quarter a year prior.

AirAsia reported largest quarterly loss on record

Malaysian budget airline AirAsia Group on Monday 06 July 2020 reported a net loss of 953 million Malaysian ringgit (S$310.5 million) for the quarter ended 31 March 2020.

This is a reverse from the 102 million ringgit (S$332 million) in net profit recorded in the same quarter a year prior.

The group said that the loss – its largest ever – was caused by a shortfall in revenue amidst impacted travel demand throughout the Covid-19 pandemic, and higher maintenance and overhaul costs by 54% due to the accounting impact from a change in aircraft ownership.

A loss on settlement from fuel hedging amounting to 110 million ringgit, as well as fair value losses on derivative investments of 270 million ringgit, also contributed to the decline.

In terms of revenue, the group posted a Q1 2020 revenue of 2.3 billion ringgit, down 15% from 2.7 billion ringgit year-on-year.

In terms of passengers flown, the group’s consolidated AOC (air operator certificate) routes reported a load factor of 78%, which AirAsia said was ‘within expectations’. The number of passengers carried was down 21% year-on-year to 9.9 million as capacity was reduced by 11%.

What’s the AirAsia share price outlook?

Following the release of its Q1 earnings, AirAsia’s share price opened 4.44% lower a day later on Tuesday 07 July 2020.

AirAsia shares – tracked by IG’s Malaysia 30 index – are trading at 0.87 ringgit apiece as at 11:25 SGT on the same day.

The stock has an average target price of 0.55 ringgit a share, based on the latest batch of analyst ratings. This represents a downside of 36.7% from the last traded price. Three out of the four analysts have also given the stock a ‘sell’ rating.

The most optimistic of the bunch is Public Bank, which gave AirAsia a ‘hold’ rating and a share price target of 0.78 ringgit. However, analysts there ‘remain cautious’ on the airline’s earnings outlook for the rest of the year as they ‘expect weaker results in Q2 due to loss in revenue after hibernation of fleet from late March 2020 as travel restrictions increased’.

They also stated that excluding non-operating losses, the group’s core net loss stood at 412.4 million ringgit.

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AirAsia’s guidance for the rest of 2020

On the group’s business outlook and performance, AirAsia Group Berhad CEO, Tan Sri Tony Fernandes, said:

‘This is by far the toughest challenge we have faced since we began in 2001. Every crisis is an obstacle to overcome, and we have restructured the group into a leaner and tighter ship.

We are positive in the strides we have made in bringing cash expenses down by at least 50% this year, and this will make us even stronger as the leading low-cost carrier in the region.’

Looking ahead, AirAsia Group expects to resume its international flights by the third quarter of 2020. It also expects the travel market to normalise in late-2021.

The group has also guided for its capacity – in terms of average seat per km – to decline between 40% and 55% year-on-year for the 2020 financial year, with load factor at between 70% and 75%.

Fernandes added that the airlines has also restructured a major portion of its fuel hedges (around 70% of its FY20 Brent contracts so far), and are still in the process of restructuring the remaining exposure, in a bid to reduce hedging losses.

To shore up liquidity and ensure sufficient working capital, the company has applied for bank loans in its operating countries and sought payment deferrals from suppliers and lenders.

Read more: AirAsia share price in massive decline following oil rout

How to trade Malaysia companies with IG

Are you feeling bullish or bearish on AirAsia Group and other Malaysia KLCI Index stocks? Either way you can buy (long) or sell (short) the asset using derivatives like CFDs offered on IG’s industry-leading trading platform in a few easy steps:

  • Create a live or demo IG Trading Account or log in to your existing account
  • Enter <Malaysia 30> in the search bar and select the instrument
  • Choose your position size
  • Click on ‘buy’ or ‘sell’ in the deal ticket
  • Confirm the trade
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Daily Financial News

Don’t Count On JPY Correction; Staying Long GBP/JPY

The path of the potential pace of the JPY decline may still be underestimated by markets, which continue trading the JPY long.

While the 10% USDJPY advance from September lows looks impressive from a momentum point of view, it may no thave been driven by Japan’s institutional investors reducing their hedging ratios or Japan’s household sector reestablishing carry trades.

Instead, investors seemed to have been caught on the wrong foot, concerned about a sudden decline of risk appetite or the incoming US administration being focused on trade issues and not on spending. Spending requires funding and indeed the President-elect Trump’s team appears to be focused on funding. Here are a few examples: Reducing corporate taxation may pave the way for US corporates repatriating some of their USD2.6trn accumulated foreign profits. Cutting bank regulation could increase the risk-absorbing capacity within bank balance sheets. Hence, funding conditions – including for the sovereign – might generally ease. De-regulating the oil sector would help the trade balance, slowing the anticipated increase in the US current account deficit. The US current account deficit presently runs at 2.6% of GDP, which is below worrisome levels. Should the incoming government push for early trade restrictions, reaction (including Asian sovereigns reducing their holdings) could increase US funding costs, which runs against the interest of the Trump team.

Instead of counting on risk aversion to stop the JPY depreciation, we expect nominal yield differentials and the Fed moderately hiking rates to unleash capital outflows from Japan.The yield differential argumenthas become more compelling with the BoJ turning into yield curve managers. Via this policy move, rising inflation rates push JPY real rates and yields lower, which will weaken the JPY. Exhibit 12 shows how much Japan’s labor market conditions have tightened. A minor surge in corporate profitability may now be sufficient, pushing Japan wages up and implicity real yields lower.

JPY dynamics are diametrical to last year . Last year, the JGB’s “exhausted”yield curve left the BoJ without a tool to push real yields low enough to adequately address the weakened nominal GDP outlook. JPY remained artificially high at a time when the US opted for sharply lower real yields. USDJPY had to decline, triggering JPY bullish secondround effects via JPY-based financial institutions increasing their FX hedge ratios and Japan’s retail sector cutting its carry trade exposures. Now the opposite seems to be happening. The managed JGB curve suggests rising inflation expectations are driving Japan’s real yield lower. The Fed reluctantly hiking rates may keep risk appetite supported but increase USD hedging costs.Financial institutions reducinghedge ratios and Japan’s household sector piling back into the carry trade could provide secondround JPY weakening effects

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Daily Financial News

Mexico raises interest rates, cites Trump as risk

The head of Mexico’s central bank says U.S. Republican candidate Donald Trump represents a “hurricane” sized threat to Mexico.

Banco de Mexico Gov. Agustin Carstens told the Radio Formula network Friday that a Trump presidency “would be a hurricane and a particularly intense one if he fulfills what he has been saying in his campaign.”

Trump has proposed building a wall along the border and re-negotiating the North American Free Trade Agreement.

Mexico’s central bank raised its prime lending rate by half a percent to 4.75 percent Thursday, citing “nervousness surrounding the possible consequences of the U.S. elections, whose implications for Mexico could be particularly significant.”

Mexico’s peso had lost about 6 percent in value against the dollar since mid-August. It recovered slightly after the rate hike

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Financial News

Africa’s first Fairtrade certified gold co-operative offers hope to gold miners living in poverty

Syanyonja Artisan Miners’ Alliance (SAMA) has become the first artisanal small scale mining co-operative in Africa to become Fairtrade certified, bringing much needed hope to impoverished communities who risk their lives to mine the rich gold seam that runs around Lake Victoria.

SAMA is one of nine previously informal groups from Uganda, Kenya and Tanzania which has benefitted from a pilot project launched by Fairtrade in 2013. This innovative program aims to extend the benefits of Fairtrade gold to artisanal miners across East Africa.

In that short time, SAMA has undergone training in business and entrepreneurship, as well as safe use of mercury, internal control systems, labour rights and better working conditions, health and safety and more. Previously, daily contact with toxic chemicals used to process gold meant members risked disease, premature births and even death.  Fairtrade gold was first launched in 2011, and SAMA now joins Fairtrade certified gold mines MACDESA, AURELSA and SOTRAMI in Peru.

The co-operative produces just 5 kg gold per year, but nevertheless has the potential to significantly benefit many people in the local community through better conditions through certification. It is expected that Fairtrade and organizations like Cred Jewellery will support the miners, ensuring their gold can be refined and made available to jewellers in the UK and other markets.

Gonzaga Mungai, Gold Manager at Fairtrade Africa said: “This is a truly momentous and historical achievement and the realisation of a dream that is many years in the making. Gold production is an important source of income for people in rural economies. Congratulations to SAMA, it sets a precedent which shows that if groups like this can achieve certification, then it can work for others right across the African continent.”

The Fairtrade Gold Standard encourages better practice and changes to come in line with international regulation around the production and trade of so-called ‘conflict minerals’. Under the Standard, miners are required to:

  • Uphold a human rights policy preventing war crimes, bribery, money laundering and child labour
  • Clearly represent where the minerals were mined
  • Minimise the risks of conflict minerals through robust risk assessments and collaboration across supply chains
  • Report to buyers and trading partners regarding the risks of conflict minerals

Now in its second phase, the programme will focus on supporting other mining groups in the region to access affordable loans and explore a phased approach to accessing the Fairtrade market, allowing more mining co-operatives across Africa to participate in the programme.

Gonzaga added: “Sourcing African metals from smallscale miners in the Great Lakes Region is the responsible thing to do. For a long time companies have avoided buying gold from this region, with devastating consequences for impoverished communities who were already struggling. It has driven trade deeper underground, as unscrupulous buyers pay lower prices and launder illegal gold into legitimate supply chains. That’s why we have chosen to work with these groups to help them earn more from their gold within a robust compliance system that offers social, environmental, and economic protections.”

The Fairtrade gold programme offers a small but scalable solution to sustainable sourcing of gold from the region in line with Section 1502 of the Dodd-Frank Act in the US, OECD Due Diligence Guidance and recent EU Supply-Chain Due Diligence proposals which could come into effect in 2016. This means that up to 880,000 EU firms that use tin, tungsten, tantalum and gold in manufacturing consumer products could be obliged to provide information on steps they have taken to identify and address risks in their supply chains for so-called ‘conflict minerals’.

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