This article first appeared in The Edge Financial Daily on November 1, 2017
KUALA LUMPUR: AirAsia Bhd shares rose in active trading yesterday after an assurance by founder Tan Sri Tony Fernandes that the budget airline will stick to its promise to reward shareholders with special dividends.
The stock rose 16 sen or 5.03% to RM3.34, giving the budget airline a market capitalisation of nearly RM11.2 billion. A total of 16.33 million shares changed hands during the day.
On Monday, AirAsia announced a joint venture (JV) with Singapore Changi Airport gateway services and food solutions provider SATS Ltd. The JV will involve share swaps, and share sale worth S$119.3 million (RM370.62 million) by AirAsia to SATS.
“Delivering to shareholders what we promised. Special dividends. Strategy is clear. Create business from assets either physical or digital. Get a JV business partner to run and grow business,” Fernandes said on Twitter after the announcement.
Reuters meanwhile reported that AirAsia plans to sell more stakes in non-flying businesses to fund special dividends to shareholders.
Upon conclusion of the JV deal by end-November, AirAsia will own 40% of SATS subsidiary SATS Ground Services Singapore Pte Ltd. On the other hand, SATS will own 49% in AirAsia’s Malaysian ground handling arm, Ground Team Red Sdn Bhd (GTR).
AirAsia’s ground handling operations in Thailand, Indonesia and the Philippines will also be injected into the JV in future, said CIMB Research in a note yesterday.
The research house highlighted two other ongoing negotations by AirAsia for the sale of equity stakes in its leasing arm and its online travel agency, worth a combined RM1.03 per share.
“AirAsia is still negotiating the sale of around a 70% stake in Asia Aviation Capital Ltd, at a whole-company valuation of some US$1 billion (RM4.23 billion), and also a sale of its remaining 25% interest in AAE Travel Pte Ltd for around US$100 million in our estimate,” said CIMB Research.
“We are raising our target price to RM3.67, adding an additional special dividend per share (DPS) of 11 sen arising from the sale of GTR, taking the expected total special DPS to RM1.27.
“The core earnings of the AirAsia group have been valued at nine times 2018 price-to-earnings ratio (PER), which is low relative to the low-cost carrier sector average of 15 times,” it said.
In a separate note, PublicInvest Research viewed AirAsia’s JV with SATS and the GTR share sale as positive for the group.
“We view the disposal of its ground handling services business positively as it helps to realise the underlying value of non-core assets within the group, as well as to improve the group’s cash flows and strengthen its balance sheet.
“AirAsia will be realising a gain on disposal of RM365.7 million in the fourth quarter ending Dec 31, 2017, boosting its headline profit by 23.6%,” said the research house.
Meanwhile, CIMB Research said that the long-term earnings impact from the JV “may be neutral”.
“While ground handling is currently treated as part of its costs, in future AirAsia will have to enter into arms-length commercial contracts with GTR for its ground handling needs.”