AirAsia’s financial health unlikely to be impacted by MAHB’s writ of summons

This article first appeared in The Edge Financial Daily, on December 13, 2018.
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AirAsia Group Bhd
(Dec 12, RM2.54)
Maintain buy with an unchanged target price (TP) of RM 3.48:
According to Reuters,  US firm Castlelake LP has clinched a deal to acquire about 30 narrow-body planes from AirAsia Group Bhd for a consideration of roughly US$800 million (RM3.34 billion). AirAsia’s net cash position will be increased from the sale. The sale of aircraft is positive for AirAsia’s shift to increase digitalisation. Maintain “buy” with an unchanged TP of RM3.48 per share.

The Castlelake deal entails the purchase of AirAsia’s older planes which are under lease to AirAsia’s affiliated airlines and is expected to be concluded in a few weeks.

Previously, management noted that there will be a net addition of 24 planes in FY19. Taking into consideration the sale of 30 planes to Castlelake, there would be a net reduction of AirAsia’s fleet (including other AOCs) by six planes. As such, we expect aircraft utilisation across AirAsia in financial year 2019 (FY19) to increase above the 2.2% recorded for nine month of FY18.

Assuming that the acquisition would be satisfied via cash, AirAsia’s cash pile would balloon up to around RM7.77 billion, translating into a net cash position of roughly RM4.57 bllion. The writ of summons by Malaysia Airports Holdings Bhd (MAHB) to AirAsia worth RM9.4 million for the uncollected international passenger service charges from July 2018 is rather small, only less than 1% of its cash pile and FY18 forecast (FY18F)/FY19F earnings. Therefore, AirAsia’s financial health will not be adversely impacted in the event that AirAsia has to reimburse the monies owed to MAHB.

We reckon that the acquisition indicates AirAsia’s aspirations to invest in shifting from being asset-heavy to being more digitally focused. Operationally, AirAsia has partnered with Airbus and Palantir to establish an integrated Big Data platform which includes forecast of predictive maintenance and efficient scheduling of parts with a potential saving of US$40,000 per aircraft per year.

Aside from big data efforts, AirAsia’s subsidiary Big Loyalty Sdn Bhd (BL) acquired shares in Thailand-based Tune Money Co Ltd, PT Tune Money and Think BIG Loyalty Hong Kong Ltd for a total purchase consideration of approximately RM690,000 in November and December this year. To recap, BL launched its BIG Xchange points conversion programme in September 2018 which is expected to increase BL’s revenue contribution from credit card points segment by 10%. — MIDF Research, Dec 12