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This article first appeared in Corporate, The Edge Malaysia Weekly, on September 12 - 18, 2016.

 

AIRASIA Bhd has received offers to buy the group’s aircraft leasing unit, Asia Aviation Capital Ltd (AAC), its co-founder Tan Sri Tony Fernandes confirms in an interview with The Edge.

He does not rule out the possibility of AirAsia selling its entire stake in AAC.

“We’ll wait and see, whether the banks can deliver what they say. I can confirm that we have received offers already,” Fernandes says.

AAC has been in the headlines of late amid market talk of AirAsia’s options to monetise the unit, which some quarters say could fetch as much as RM4 billion.

Proudly commenting that AirAsia has many valuable assets, of which AAC is one, Fernandes says, “It justifies my long-standing argument that it is better to own planes than to just rent them. We now have assets that the stock market never gave us any credit for. And now, it is beginning to see the value of what we have created.

“It has been a good strategy. Obviously, all those rumours and reports [on AAC] mean that we have a lot of value. At the end of the day, the board agreed that is something we can monetise.” 

However, Fernandes, who, with his partner Datuk Kamarudin Meranun, will soon inject RM1 billion into AirAsia via a share placement, declines to reveal how the low-cost carrier will utilise the sales proceeds should it strike a deal to dispose of AAC.

AirAsia may use the proceeds to buy another airline, he quips.

The massive share placement, which shareholders have approved, will raise the combined stake of the two founders from 18.9% to 32.4% — slightly below the 33.3% threshold to make a mandatory general offer for the budget airline.

AAC has a fleet of 55 aircraft, all of which are Airbus A320s. Most of the aircraft are leased to AirAsia Group’s airlines while two aircraft are leased out to a third party. AAC made RM75.2 million in the second quarter ended June 30, 2016 (2QFY2016).

AirAsia’s decision to monetise AAC stems from its whopping debt.

According to Hong Leong Investment Bank analyst Daniel Wong, AAC’s debt stood at RM2 billion as at 2QFY2016. This is expected to swell to RM7 billion when the company takes over another 66 A320s up to 2030.

“The divestment of AAC will improve AirAsia’s balance sheet and cash flow significantly. The upcoming RM1 billion private placement (by October) will also improve AirAsia’s net gearing,” he says in an Aug 30 note.

As at June 30, AirAsia’s net gearing stood at 1.6 times, lower than the 2.2 times a year ago but still higher than that of other airlines of comparable fleet size in the region, such as Cathay Pacific Airways Ltd (0.83 times), while Singapore Airlines Ltd is in a net cash position.

AirAsia’s short-term debt amounted to RM1.85 billion as at June 30 while its cash balance totalled RM1.58 billion. The group’s long-term debt stood at RM8.9 billion.

More than 85% of AirAsia’s debt is in US dollars. However, as at June 30, the group had hedged 58% of its US dollar liabilities against the ringgit at the latest weighted average of the US dollar-ringgit exchange rate of 3.2368.

Wong has a target price of RM3.85 for AirAsia and has recommended a “buy”. In his calculations, AirAsia’s sum-of-parts valuation is divided into four businesses — its Malaysian operation, its 45% stake in Thai AirAsia, 13.8% stake in AirAsia X Bhd (AAX) and 13.7% in Tune Protect Group Bhd.

The effective valuation of AirAsia before holding company discount, according to Wong’s calculations, is RM14.3 billion. This does not include the value of AAC, to which reports have ascribed RM4.1 billion. At RM3.85 per share, AirAsia is valued at RM12.9 billion.

Besides its Malaysian and Thai operations, and its equity interest in AAX and Tune Protect, AirAsia also has associate stakes in PT Indonesia AirAsia (IAA), AirAsia Philippines Inc (AAP) and AirAsia (India) Pvt Ltd. All three associate airlines have yet to be profitable.

Fernandes, however, is confident that IAA and AAP will turn around by the end of the year. Their net loss narrowed considerably year on year in 2QFY2016 as they cut capacity and rationalised routes.

 

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