AirAsia Bhd
(March 9, RM2.87)
Maintain buy call with an unchanged target price (TP) of RM3.45: AirAsia Bhd held an analyst briefing at its RedQ (headquarters) which was headed by How Kim Lian (chief financial officer), Esme Law (head of international relations) and Alifnor (of Asia Aviation Capital, [AAC]).

The briefing focused on providing analysts with further clarity on a variety of matters, chief among them were the effects of currency volatility on earnings, Indonesia AirAsia (IAA) and Philippines AirAsia’s (PAA) capital position, listing plans and insights into the structure of AAC.

To recap, AirAsia recorded a RM54 million gain on foreign exchange (forex) for its recently released fourth quarter of financial year 2016 (4QFY16) results, which were surprising given there was a mismatch in the currency denominations of its assets and liabilities which should have led to a forex loss: its aircraft assets were captured in ringgit while 85% of its borrowings (liability) were denominated in US dollar.

Management explained that the main reason for this discrepancy is the novation of 29 of its owned aircraft fleet from AirAsia’s books into its fully owned subsidiary, AAC which captures both its assets and liabilities in US dollars.

Hence, with AAC having a net asset position, a strengthening of the US dollar would result in AirAsia recording an unrealised gain on forex. We think that this is a good move, potentially resulting in less erratic unrealised gains/losses.

On another note, AirAsia receives 34% of its revenue in foreign currencies which helps to offset a good portion of its US dollar-denominated operating expenses which we estimate at 70% of its total expenses.

Having recapitalised both IAA and PAA (substance over form accounting treatment) through debt (accounts receivables) to equity (perpetual bond) swaps, the future share of IAA’s and PAA’s profits or losses will be recorded in AirAsia’s bottom line. Both have turned profitable operationally and could provide upside to our earnings forecast.

Management is studying various listing proposals including reverse takeovers for IAA and PAA which would help raise fresh funds and diversify the domestic shareholder base to comply with minimum domestic shareholder regulations. Besides, the idea of a dual listing in either Hong Kong or the US aimed at drawing a broader investor base to enhance the company’s valuations is also being analysed.

Ultimately, AirAsia aspires to list a holding company in Hong Kong which fully owns each of its operations across Asia.

In our previous report, we emphasised that the sale of AAC would be the highlight for AirAsia in 2017. While refraining from divulging specifics, management updated analysts that the sale is progressing well and could be concluded by 3QFY17 as planned.

That said, management was generous enough to share with us that the structure of AAC would consist of 29 aircraft which would grow to 36 comprising aircraft leased to AirAsia’s associates, 28 aircraft from Malaysia AirAsia which would entail a sale and leaseback agreement, 14 aircraft engines, and a third of AirAsia’s 400 aircraft order backlog with Airbus consisting of A320neo and A321neo aircraft.

Meanwhile, the previously floated price tag of US$1 billion to US$1.2 billion remains intact and could result in a significant gain on disposal, in our view.

We like AirAsia as one of our top aviation sector picks predicated on stable demand growth with conservative available seat kilometre expansion of 10%, monetisation of AAC that could potentially lead to special dividends, progress in turning around of IAA and PAA, and new areas of growth in AirAsia India and AirAsia Japan. — MIDF Research, March 9