AIRASIA Bhd is evaluating several proposals from investors and bankers to either sell equity interest in its wholly owned aircraft leasing company, which was formed less than a year ago, or list the unit.
“The proposals are in but no banks have been assigned yet. A decision will be made within six months,” AirAsia group CEO Tan Sri Tony Fernandes tells The Edge.
Besides building the budget carrier’s war chest, he adds, the proceeds from the sale will be utilised to buy back shares and pay dividends.
AirAsia (fundamental: 0.2; valuation: 0.6) got the green light from the Labuan Financial Services Authority last September to start its leasing business in the federal territory. The low-cost carrier then incorporated a wholly-owned subsidiary known as Asia Aviation Capital Ltd (AAC) to provide aircraft leasing services to the AirAsia group, including AirAsia X and affiliate companies outside Malaysia, namely Thai AirAsia Co Ltd, PT Indonesia AirAsia, AirAsia Inc, Zest Airways Inc and AirAsia India Pvt Ltd, and future associate companies.
With an initial paid-up capital of US$100, AAC owns and manages at least 70 aircraft. Its principal activities are acquiring aircraft and securing financing for them, providing operating leases to the affiliates, managing the portfolio of aircraft, including technical services, and remarketing aircraft leases and/or the sale of aircraft.
Currently, Datuk Kamarudin Meranun, Aireen Omar and Rozman Omar are the directors of AAC.
Although Fernandes did not elaborate on the prospects for the leasing business, an indication of how big it could be are the 322 airplanes — 58 A320-200s and 264 A320neos — that the AirAsia group has ordered from Airbus Industrie. This compares with only 150 airplanes currently owned and operated by AirAsia.
The plan to sell a stake in the leasing unit or spin it off comes after reports that said AirAsia was considering a sale and leaseback arrangement for its aircraft — which carry a book value of more than RM7 billion — to improve its cash position and take advantage of the stronger US dollar and lock in some disposable gains.
Earlier, Fernandes was quoted by the media as saying that AirAsia would dispose of 11 A320 airplanes for US$271 million (RM1 billion) under sale and leaseback agreements, which analysts estimate would see AirAsia gain US$45 million (RM166.5 million).
There are many reasons why investors could warm up to AirAsia’s plan to expand its leasing business.
For one, like in most transport industries, aircraft lessors have proved to be among the most profitable in the aviation industry over the past decade.
Additionally, a cash infusion of any kind will do the AirAsia group some good and in this instance, it will potentially reduce its net gearing ratio.
As at Dec 31, 2014, AirAsia’s total borrowings stood at RM12.7 billion while its cash balance was RM1.3 billion, which translates into net gearing of 2.5 times.
Fernandes has quashed rumours that he is raising equity cash, although AirAsia is monetising its assets, its most recent disposal being a 25% stake in AAE Travel Pte Ltd, which resulted in a gain of RM279.6 million and cash flow of RM306.2 million.
According to Public Invest Research, other investments that the LCC can divest include the remaining 25% it owns in AAE Travel, a 50% stake in Asian Aviation Centre of Excellence Sdn Bhd and 50% equity interest in Think Big Digital Sdn Bhd.
Whopping receivables
Several research houses have downgraded AirAsia mostly due to receivable risks at its affiliates, in particular, Indonesia AirAsia, which suffered an aviation disaster — QZ8501.
UOB Kay Hian downgraded the stock to a “hold” because while AirAsia’s 49% stake in IAA has been fully written down, the latter still has payables of about RM1.3 billion to the former. This amounted to 47 sen per share as at September 2014 or about 24% of AirAsia’s estimated 2014 book value.
In a March 24 note, Alliance Research says AirAsia’s shares have fallen 26% from their peak in December 2014, following the QZ8501 crash, concerns over a strengthening US dollar and the launch of new airline, flymojo.
It says while these concerns are valid, the market may have overly punished the stock as its valuation remains decent at 7.1 times forward for the financial year ending Dec 31, 2015. Its target price implies a complete write-off of IAA’s related assets (receivables, equity and so on).
CIMB Equities Research downgraded AirAsia from an “add” to a “hold” because it no longer expects the shares to perform despite low crude oil prices. This is because there is an oversupply of airlines in Malaysia, it says, adding that Fly Mojo Sdn Bhd will unveil flymojo this October and deploy CS100 jets.
This article first appeared in The Edge Malaysia Weekly, on March 30 - April 5, 2015.
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