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AirAsia Bhd
(March 23, RM2.18)

Reaffirm outperform with a target price (TP) of RM3.08: According to various news sources, AirAsia Bhd is reportedly considering a sale and leaseback arrangement of its aircraft, amounting to approximately RM1 billion to improve its cash position and to take advantage of the stronger US dollar and lock in some disposal gains. We are keeping our forecasts unchanged for now, pending further clarifications from the management or an official announcement.

As at financial year 2014 (FY14), AirAsia has total borrowings of RM12.7 billion while its cash balance stands at RM1.3 billion, and a net gearing level of 2.5 times. Hence, a cash infusion by any means will do the group good, and in this instance it will potentially bring its net gearing level down to 2.2 times.

AirAsia group chief executive officer Tan Sri Tony Fernandes was quoted as saying that there is also the possibility of gaining an accrued profit of about RM170 million if the said disposal does take effect.

On a reported rights issue, we do not believe there’s a need for one, especially at the current share price levels. While cash infusion will strengthen the balance sheet at the moment, AirAsia has various other assets and/or invesments it can monetise. A case in point is the recent disposal of a 25% stake in AAE Travel Pte Ltd which reaped a gain of RM279.6 million and cash flow of RM306.2 million. On record, AirAsia owns about 150 aircraft which it could progressively unload (and lease back) should the need arise, more so with the strong US dollar currently. Other investments which it can divest include the remaining 25% it owns in AAE Travel, 50% of Asian Aviation Centre of Excellence Sdn Bhd and 50% of Think Big Digital Sdn Bhd.

Competitive pressures from new entrant flymojo is anticipated to be muted for some time at least, given its current lack of economies of scale. AirAsia’s first-mover low-cost advantage and stronger brand name stands it in better stead competitively, and this is adequately reflected in its recent financial results.

We have not adjusted our earnings estimates, pending clarification from the management regarding this issue and/or an official announcement to this effect. We are therefore keeping our “outperform” call and TP of RM3.08 unchanged, tagged to a 10 times price-earnings multiples of FY16 ending Dec 31, 2016 earnings per share. We see the current share price weakness as an opportunity for accumulation. — PublicInvest Research, March 23

 

This article first appeared in The Edge Financial Daily, on March 24, 2015.

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