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AirAsia Bhd
(June 16, RM1.64) 
Maintain add with a lower target price of RM2.26:
AirAsia’s share price has reacted strongly to GMT Research’s report, which set a target price of RM1.23 as it believes a large dilutive rights issue is in store. However, if AirAsia successfully secures new investors in Indonesia and the Philippines, the stock could stage a relief rally. Our base-case target price of RM2.26 (25% upside) is based on the belief that AirAsia will be able to avoid a punishing rights issue by successfully bringing new investors into Indonesia AirAsia (IAA) and AirAsia Philippines (AAP) and obtaining a RM1 billion repayment of the associate balances owed to it. This is in addition to securing the sale and leaseback of 16 older planes for total proceeds of US$384 million (RM1.44 billion); eight deals have already been concluded.

The worst-case target price is RM1.11 (39% downside). In the event that AirAsia fails to obtain new investors, the pressure of funding IAA and AAP entirely with its own resources will probably lead to AirAsia raising new equity via a rights issue. Assuming RM2 billion is raised via the issue of two billion new shares at RM1 each, our target price will fall to RM1.11. The best case will only materialise if AirAsia successfully finds a way to structurally make IAA and AAP sustainably profitable for the long term. While we have not seen this happen yet, we know that AirAsia has been hard at work to achieve this.

The 39% downside in the worst-case scenario against a potential upside of 25% in the base case (which is also the best possible near-term solution) does not look like a good bet. However, as this report was going to print, AirAsia announced a preliminary “solution” that will see IAA and AAP receiving RM360 million in new cash equity from its local partners, and issue RM750 million in convertible bonds. In total, the two associates will receive RM1.11 billion, most of which will be used to repay amounts owing to AirAsia. The announcement  will likely put a floor on AirAsia’s share price, or even result in a relief rally, particularly when the short sellers cover their positions. In the long term, AirAsia still has to make IAA and AAP sustainably profitable airlines. — CIMB Research, June 15

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This article first appeared in The Edge Financial Daily, on June 17, 2015.

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