AirAsia Bhd
(July 7, RM1.49)
Maintain buy with target price of RM2.62: Last Friday, the Jakarta Post reported that 13 airlines in Indonesia (including Indonesia AirAsia [IAA]) are in a race against time to turn their negative equity position by the end of this month to avoid having their operating permits suspended by the Transport Ministry.

Transport Minister Ignasius Jonan was quoted as saying that it is important for all airlines to maintain positive equity, as it affects an airline’s financial ability to maintain safety standards.

Under the new regulations, scheduled airlines operating planes with a capacity of 70 seats or more are required to have a paid-up capital of 500 billion rupiah (RM142.98 million).

Based on IAA’s accounts as at March 31, 2015, its share capital stood at 180 billion rupiah and the shareholders’ funds amounted to a deficit of 3,035 billion rupiah.

So, to comply with the new regulations, IAA has to find ways to inject at least  3,035 billion rupiah to reverse the deficit position and as much as 320 billion rupiah has to be in the form of equity capital.

Fundraising is needed by IAA. We reckon that any fundraising exercises of this size could be an uphill task for IAA given its 530 billion rupiah net losses in the first quarter of 2015.

However, we believe AirAsia would keep the company afloat as Indonesia is one of the important networks within the AirAsia group. It could be a costly decision to cease operations in Indonesia.

Debt instruments could be the best options. Given the risk involved, we believe it is easier for IAA to issue convertible perpetual bonds, which bondholders will have priority claims against the company in the event of a default, to meet the positive equity requirement.

Although interest payments (coupon payments) would likely eat into IAA’s future profitability, we consider this as one of the best funding options for AirAsia as it could utilise some of the funds to settle the inter-company loans.

However, in any case that IAA chooses to raise equity funds, AirAsia will have to subscribe to RM424 million worth of new shares or its shareholding in IAA will be diluted.

We maintain our financial year 2015 (FY15) to FY17 earnings projections, pending announcements from AirAsia in relation to its stance in IAA at the end of this month.

Based on AirAsia’s RM1.6 billion cash as at March 2015, it should have no problem to fork out RM45 million in cash to comply with the new minimum share capital requirement for its operation in Indonesia.

We maintain AirAsia’s target price at RM2.62 per share based on unchanged 13 times calendar year 2016 (CY16) earnings per share.

Overall, we are neutral on this news as AirAsia is in the midst of planning a pre-initial public offering (IPO) exercise to restructure IAA. The financial implications of this new capital structure could be indifference to the pre-IPO exercise. Maintain “buy”. — TA Securities, July 7

This article first appeared in The Edge Financial Daily, on July 8, 2015.