This article first appeared in The Edge Malaysia Weekly on July 17, 2023 - July 23, 2023

AFTER nearly two years, AirAsia X Bhd (AAX), the medium-haul, low-cost affiliate of Capital A Bhd, is ready to exit the classification for financially distressed companies.

Sources close to AAX say the airline plans to make an application to Bursa Securities to lift itself out of Practice Note 17 (PN17) status in a matter of days, as it no longer triggers any of the PN17 criteria under the Main Market listing requirements.

An aviation analyst at a bank-backed research firm tells The Edge: “There are many criteria that go into the lifting of PN17 status. One criterion to meet is that the listed issuer’s shareholders’ equity must be more than RM40 million. AAX’s shareholders’ equity turned positive in the first quarter ended March 31, 2023, to RM40.76 million, from a negative RM599.9 million in the preceding quarter. It recently raised RM50 million through a private placement of shares, which will bump up the shareholders’ equity to RM90 million.”

AAX has also now recorded three consecutive quarters of positive results up to the quarter ended March 31, 2023. Thanks to a restructuring of debts, which saw it write RM33 billion of liabilities and provisions for liabilities back to profits, and the recovery of demand in the region, the airline posted a net profit of RM328 million in 1QFY2023, up from RM153.48 million in 4Q2022 and RM25.09 million in 3Q2022. As at end-March 2023, AAX’s cash and equivalents stood at RM192.37 million.

AAX was designated as distressed in October 2021 when its external auditor Messrs Ernst & Young PLT questioned the airline’s ability to continue as a going concern in its audited financial statements for the 18-month financial period ended June 30, 2021. The Covid-19 pandemic resulted in a substantial loss for AAX, with a net loss of RM33.72 billion for the financial period ended June 30, 2021, and current liabilities exceeding current assets by RM34.21 billion. In addition, the airline reported a shareholders’ deficit of RM33.58 billion.

The latest balance sheet data shows that AAX’s net current liabilities for 1QFY2023 were RM35.71 million, albeit significantly narrower than the preceding quarter’s RM657.32 million. It remains to be seen whether the airline’s total current assets will finally exceed total current liabilities in 2QFY2023. It is worth noting that its independent auditor had highlighted the airline’s net current liabilities position as at end-June 2021 in the basis for disclaimer of opinion report. AAX is due to release its 2QFY2023 financial results in August.

A source close to AAX expects the airline to be out of PN17 status “on its own accord” ahead of the July 28 deadline to submit its regularisation plan, which involves Capital A injecting its aviation business into AAX via an issuance of shares.

“So whether or not AAX will go on to acquire the aviation business of Capital A through AirAsia Bhd (AAB) and AirAsia Aviation Group Ltd (AAAGL), it will be purely academic. [Because with the uplifting of the PN17 status,] there will be no pressure on AAX to go through the plan to regularise its financial condition,” the source says.

Sources believe the exit from PN17 status will put AAX in a better position to negotiate the terms of its acquisition of Capital A’s aviation assets. “AAX is now debt-free and profitable, and will be out of PN17,” says the analyst.

A source says: “The pressure is now on Capital A to finalise the proposed regularisation plan to lift itself out of PN17 status, as it is hoped that the sale of its aviation business will result in a gain on disposal that will be enough to offset its negative shareholders’ equity position.

“While Capital A has shown two consecutive quarters of net profit up to the latest quarter ended March 31, 2023 (1QFY2023), it still needs to resolve its negative shareholders’ equity, which stood at RM5.55 billion as at end-March 2023. Perhaps Capital A can consider throwing in free warrants to AAX shareholders, for example, to sweeten the deal to convince AAX’s shareholders to back the acquisition offer for its aviation assets. The new warrants will help reduce the dilution  of existing AAX shareholders’ shares.”

The source also points to AAX’s stock, which has risen significantly by 253% since AAX announced the potential acquisition of Capital A’s aviation business on Nov 29 last year. It closed at RM1.57 last Friday. Over the period, the airline added RM502.96 million in market value to reach a total market capitalisation of RM701.9 million.

“Capital A must prove that the new enlarged entity would be worth more than the current level of RM1.57 post-acquisition to be value-enhancing for AAX’s shareholders,” the source says.

According to Bloomberg data, AAX is trading at a price-earnings ratio (PER) of 1.73 times on a trailing 12-month basis. While this is below the PER of its listed regional peers, which may indicate that the stock is trading at a lower valuation than that of the industry, its depressed trailing multiple might be skewed by lumpy accounting recognition (particularly the RM33.6 billion write-back in its book during the financial period). In comparison, Singapore Airlines Ltd is now trading at a trailing PER of 21.36 times, Japan Airlines Co Ltd at 38.11 times and ANA Holdings Inc at 17.20 times.

“If the market is confident of the airline’s future growth rate, then AAX should be trading at a higher PER. At a PER of 10 times, for example, AAX’s stock would be trading at RM11.60 or RM12. Thus, Capital A must provide the most compelling value proposition to AAX’s shareholders,” the source says.

The analyst notes that Capital A requires more than 50% of AAX’s minority shareholders’ approval to sell its aviation business to AAX. They include Lembaga Tabung Haji, Lavin Group Sdn Bhd, AHAM Asset Management Bhd and AIIMAN Asset Management Sdn Bhd. As at end-March 2023, former AAX deputy chairman Datuk Lim Kian Onn held a 4.239% stake in the airline.

The top shareholders of AAX are Capital A co-founders Tan Sri Tony Fernandes and Datuk Kamarudin Meranun, with direct stakes of 2.69% and 8.94% respectively in AAX as well as an indirect stake of 31.59% through Tune Group Sdn Bhd (17.83%) and AAB (13.76%).

“Because most of the minority shareholders of AAX are retail investors, institutional funds such as Tabung Haji and AHAM Asset Management are likely to hold greater power to decide on the proposed acquisition,” the analyst adds.

The proposed corporate restructuring entails the disposal of Capital A’s aviation arm — AAB and AAAGL — to AAX to form a separate publicly quoted aviation group comprising six airlines — four short-haul airlines and two medium-haul airlines: Malaysia AirAsia, Thai AirAsia, AirAsia Indonesia, AirAsia Philippines, Malaysia AAX and Thai AirAsia X. Post-restructuring, Capital A will be a pure aviation services and digital group whereas AAX, which will be renamed AirAsia Aviation Group, will own all the air operator’s certificates (AOCs).

The July 7 deadline for Capital A to submit its regularisation plan has passed, but Capital A had on June 30 requested an additional three months until Oct 7 to file its regularisation plan. It is still awaiting the stock exchange’s approval.

The number of AAX shares that can be swapped for Capital A’s aviation business has yet to be set. Sources say a reason for the delay in finalising the proposed regularisation plan is the difficulty in estimating the value of continuing goodwill of Capital A’s aviation business. At the close of trading last Friday, Capital A’s market capitalisation stood at RM3.5 billion compared with AAX’s market cap of RM701.9 million.

“The value of goodwill is not equal to Capital A’s current market value of RM3.5 billion, which currently includes the non-aviation business. You must do a sum-of-the-parts analysis to estimate the value of each business segment, be it aviation, Asia Digital Engineering, airasia Superapp, BigPay or Teleport. And will combining core goodwill with the inherent strengths of AAX significantly improve its future performance?” a source asks.

“Also, the value of goodwill is an unidentifiable, intangible asset estimated from future cash flow. However, the expected profitability and cash flow are anyone’s guess.”

Capital A’s 2022 annual report shows its intangible assets included an aggregate goodwill of RM273.47 million relating to subsidiaries Indonesia AirAsia and Velox Technology (Thailand) Co Ltd. In addition, its intangible assets included the landing rights of Indonesia AirAsia and Philippines AirAsia worth RM443.9 million as at Dec 31, 2022.

In a Dec 1, 2022, report, Maybank Investment Bank aviation analyst Samuel Yin Shao Yang values Capital A’s aviation business — Malaysia AirAsia, Indonesia AirAsia, Philippines AirAsia and Asia Aviation — at RM4.37 billion, or 73 sen per share, based on a forward PER (FY2024) of eight times. He ascribes a higher valuation of RM5.66 billion or 94 sen per share to Capital A’s digital business.

Sources close to AAX say Capital A will have to value its aviation business above RM9 billion to offset its accumulated losses of RM8.87 billion as at end-March 2023, and lift itself out of PN17 status. For example, a RM10 billion valuation would be 186% higher than Capital A’s current overall market cap of RM3.5 billion.

AAX currently operates nine aircraft and expects 16 to be operational by year’s end to support its expansion plans and maximise its value to the group.

Meanwhile, Capital A says it had reactivated 157 aircraft as at 1Q2023 and plans to fully reactivate all 207 aircraft by 3Q2023 to position itself for future growth.

Analysts expect details of the proposed acquisition to be announced over the next two months. “While good progress has been made on substantial issues between Capital A and AAX, final negotiations on the valuation are still ongoing,” says the source. 

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