[Click eStock] "Jeju Air, Acquisition of Eastar Jet is a Burden at This Point"

[Asia Economy Reporter Minji Lee] Daishin Securities maintained its market perform rating and target price of 25,000 KRW for Jeju Air on the 3rd, stating that the acquisition of Eastar Jet could act as a burden factor at this point in time.

[Image source=Yonhap News]

On the previous day, Jeju Air agreed to acquire 51.17% of Eastar Jet's shares for 54.5 billion KRW. Excluding the issuance of 10 billion KRW in convertible bonds to Eastar Holdings and the advance payment of a performance bond of 11.95 billion KRW, Jeju Air's additional payment is estimated to be 32.55 billion KRW.

Researcher Yang Ji-hwan of Daishin Securities explained, “Due to the global spread of the novel coronavirus infection (COVID-19), the current airline industry is experiencing the worst conditions in history,” adding, “Entry bans on Koreans, strengthened quarantine measures, and the lifting of quarantine are likely to continue until no new COVID-19 cases appear, resulting in significant uncertainty in the industry.”

It is expected that the operations and passenger numbers of low-cost carriers will drop by more than 50% in February and March compared to the same months last year. Jeju Air is estimated to hold about 150 billion KRW in cash and cash equivalents as of the end of January, but most of this cash is likely to be depleted by the end of the first quarter. Researcher Yang pointed out, “For the time being, the company will likely need to secure cash through short-term borrowings and corporate bond issuance.”

Based on the 2018 financial statements, Eastar Jet appears to be in a state of about 48% capital erosion. The company is judged to be in a state of full capital erosion as of the end of 2019.

Researcher Yang Ji-hwan said, “A substantial capital increase for Eastar Jet is inevitable,” adding, “In the short term, increased borrowings and deteriorating consolidated financial performance will inevitably act as a burden on Jeju Air.”