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Cathay Pacific ends lower after initial surge on HK$39b rescue plan
CATHAY Pacific Airways Ltd shares ended lower on Wednesday, after surging the most since 2008 in pre-market trading on news of the carrier's HK$39 billion (S$7 billion) government-backed rescue plan.
Traders said a rush to cover short positions was behind the close to 19 per cent pre-market move, which faltered almost as soon as the regular session began. Trading in Cathay was suspended on Tuesday ahead of an announcement on the recapitalisation, which includes the issuance of preference shares, warrants, rights and the extension of a bridge loan, but they soared 18.73 per cent to HK$10.46 on resumption of trading on Wednesday, before sharply retreating within minutes and ending 1.02 per cent down at HK$8.72.
While the plan eases concerns over Cathay's liquidity, the recovery outlook is "dim" and its monthly cash burn is likely to remain high, Credit Suisse Group AG said as it downgraded the stock to the equivalent of sell. Daiwa Securities Group Inc also lowered its rating to sell, saying minority shareholders will be diluted by Cathay's issuance plans.
Cathay has dropped 23 per cent this year, just outperforming a Bloomberg gauge of Asia-Pacific airlines, which is down 25 per cent after the coronavirus pandemic destroyed travel demand. Short interest in Cathay shares was about 13 per cent of free float as of Monday, according to IHS Markit Ltd data.
The International Air Transport Association said on Tuesday that airlines are expected to lose US$84.3 billion this year, with revenue projected to slump 50 per cent to US$419 billion. "Financially, 2020 will go down as the worst year in the history of aviation," the industry group's director general Alexandre de Juniac said. "On average, every day of this year will add US$230 million to industry losses."
Cathay said its plan is designed to provide sufficient funds to survive the industry downturn and set a platform from which to review and transform its business, which chairman Patrick Healy warned would collapse without the HK$39 billion recapitalisation.
"Cathay's recapitalisation plan will secure its survival but dilute earnings per share by up to 43 per cent," Bloomberg Intelligence analysts James Teo and Chris Muckensturm said. "Shareholders subscribing to its rights issue face 6 per cent dilution if warrants are fully exercised. An offering of preferred shares may result in a HK$585 million annual dividend paid to the Hong Kong government, leaving less for other shareholders."
Prior to the pandemic, Cathay was already under enormous financial strain due to Hong Kong's anti-government protests, which affected traffic numbers and led to the exit of the company's former chief executive officer. Passenger revenue is only about one per cent of prior year levels.
The airline posted an unaudited loss of more than HK$2 billion in February alone, and since then it has been losing HK$2.5 billion to HK$3 billion a month. Its main shareholders Swire Pacific Ltd, Air China Ltd and Qatar Airways have undertaken to vote in favour of all resolutions for the recapitalisation plan.
"Financially this gives them probably enough for a year to two years," Sobie Aviation's Brendan Sobie said. "This is just one step to survive the crisis."
He said the plan was the best scenario for those involved and maintains the shareholding balance for Swire Pacific, Air China and Qatar Airways. It also helps preserve Hong Kong's position as an aviation hub. Next, Cathay will have to make strategic decisions on fleet size, capacity and other areas to align with an international market that will take time to recover.
Cathay's Mr Healy said "tough decisions" would need to be made in the fourth quarter to get the airline to the right size and shape to compete effectively, and that "nothing is off the table" in terms of what needed to be done. The company may access equity and debt capital markets again to strengthen its balance sheet if conditions are right, he added. BLOOMBERG, AFP