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This article first appeared in The Edge Financial Daily on March 5, 2018

AirAsia Bhd
(March 2, RM4.35)
Maintain outperform with a lower target price (TP) of RM5.03:
Asia Aviation Capital Ltd (AACL) is expected to divest its entire equity interest in its four subsidiaries (that is Red Aircraft Holdings 1-4) and its aircraft assets to entities managed by BBAM, namely Nomura Babcock & Brown Co Ltd, FLY Leasing Ltd and Incline B Aviation Ltd Partnership for US$1.2 billion (RM4.68 billion). BBAM is the world’s largest manager of commercial jet aircraft and has more than 400 aircraft leased to over 200 airline customers in more than 50 countries. The disposal involves 84 aircraft and 14 aircraft engines. This will be satisfied via cash (about US$1.1 billion), investment in Incline Funds (US$50 million) and subscription of about 10.2% of FLY (US$50 million). Subsequently, AACL and/or its affiliate airlines will enter into lease agreements to lease 79 aircraft and 14 engines from the respective purchasers. Following the agreements, it also entered into a disposal agreement with Incline B and FLY of up to 48 aircraft to be delivered to AirAsia Bhd and an option to acquire a further 50 aircraft to be delivered, whereby the said aircraft will be leased to AirAsia and/or its affiliates. However, the disposal consideration will be agreed at a later date.

 

Management estimated that the gain arising from the proposed disposal is approximately RM967.1 million. Meanwhile, the repayment of the existing financing is expected to result in pro forma gross gearing ratio falling from 1.6 times to 0.4 times. Upon completion of the proposed disposals, AirAsia is expected to incur rental expenses of about RM404.3 million per annum under the lease arrangements for 37 aircraft. However, this will be partially offset by the finance expense savings of RM110.2 million per annum arising from the repayment of borrowings as well as annual saving in depreciation expense of RM206.2 million per annum. As a result, it will increase costs by about RM89 million. Subsequently, we estimate that AirAsia will also be losing its aircraft operating lease income by about 40%. Overall, it would reduce our financial year 2019 (FY19) to FY20 by an average of 26.4%. The proposed disposal, aircraft transfers and receipt of the proceeds are expected to be completed by third quarter (3Q) of 2018.

The gross proceeds to be raised amounting to US$901.8 million is expected to be used to pay its borrowings of RM788.1 million, estimated expenses of the proposed disposal of RM112 million and a portion of the remaining proceeds will be distributed as special dividend (with the quantum to be determined later). — PublicInvest Research, March 2

 

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