Friday 23 Feb 2024
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KUALA LUMPUR (Oct 20): The recent rejection of AirAsia X Bhd's (AAX) application for upliftment from Practice Note 17 (PN17) status by Bursa Securities has cast doubts on the feasibility of the proposed acquisition of Capital A Bhd's aviation business.

Analysts have pointed out that the acquisition would not resolve the PN17 status for either company, as AAX would still be considered a financially distressed entity. This could make it difficult for the combined company to meet the listing requirements of Bursa Malaysia. AAX now has until Jan 17 to submit its regularisation plan.

"Time is not on its side. They are caught in a bind. They need a magician to get out of this," said Shukor Yusof, the founder and analyst of aviation consultancy Endau Analytics.

As a result, the proposed acquisition may now be seen as a less attractive option for both companies. Capital A may be reluctant to proceed with the deal if it does not lead to the upliftment of AAX from PN17 status. AAX, on the other hand, may find it difficult to secure the necessary financing for the acquisition if it remains under PN17 status.

Analysts said the rejection of AAX's PN17 upliftment application could therefore have a significant impact on the proposed acquisition. 

They believe there is a possibility that the deal could be scrapped entirely, and alternatively, the terms could be renegotiated with AAX or even other parties. 

While the specifics of the asset injection were never disclosed, it was understood that the restructuring would involve a share swap and a valuation of goodwill of Capital A airlines. 

An aviation analyst at a bank-backed research firm told The Edge that for one, there is no guarantee that Capital A’s other businesses, namely digital and logistics, will prove to be profitable for the company without the support of its airline business. 

“The key for Capital A to get out of PN17 status is to show its profitability. Can they do that without the airline [business]?” he questioned. 

The analyst was referring to the four short-haul airlines currently still under Capital A, which are Malaysia AirAsia, AirAsia Thailand, AirAsia Indonesia and AirAsia Philippines. 

Furthermore, due to Bursa Securities’ rejection, AAX is no longer in a strong negotiation position to acquire those airlines to help Capital A’s regularisation strategy to uplift itself from PN17 status.

In November last year, as a precursor of its regularisation strategy, AAX in a bourse filing said it would acquire Capital A’s aviation arm held through AirAsia Bhd (AAB) and AirAsia Aviation Group Ltd (AAAGL).

Following the acquisition, AAB, AAAGL and AAX will form a consolidated group, which will be named AirAsia Aviation Group, comprising six airlines — four short-haul and two medium-haul airlines — Malaysia AirAsia, AirAsia Thailand, AirAsia Indonesia, AirAsia Philippines, Malaysia AAX and Thai AAX. 

Another aviation analyst who covers Capital A concurred, saying that minority shareholders of AAX may not even vote in favour of the acquisition of Capital A’s aviation business. 

“I don't see any logic of the need to do this (the acquisition of Capital A’s aviation business). If the only reason is to offset the negative equity from the goodwill paid by AAX to ensure it is out of PN17 status, then the question arises whether the valuation is fair or not?” he questioned. 

“Funding through a rights issue will mean a dilution, which doesn't go well for the minorities,” the analyst added. 

Bursa on Thursday rejected AAX’s application for relief from having to submit and implement a regularisation plan for its PN17 status, as well as the upliftment from the status under the Main Market Listing Requirements.

This came after the medium-haul low-cost carrier submitted the application on July 20, on recent improvements in the group and its subsidiaries' financial performance.

At this juncture, both Bursa and AAX have not revealed the reason behind the rejection. As it stands, AAX seems to have fulfilled the requirements to be lifted from the financial distressed category having proved itself to be profitable over the last four consecutive quarters, and recording a positive shareholders’ equity of RM96.13 million, which exceeded its share capital of RM51.03 million and a cash balance of RM268.96 million as at end-June 2023. 

According to Endau’s Shukor, AAX needs to get back to the drawing board, and “rejig its regularisation plan, which might include infusion of funds to shore up the valuation”. 

“Maybe [it is] best to take AAX private but that, too, won't be easy now that it's under PN17 status. The longer this drags on, the weaker AAX will be [to exit PN17 status].”

He argued that AAX is currently in a Catch-22 situation as the rejection will slow and stutter the group’s progress to capitalise on the rising travel appetite.

Shares of AAX closed 8 sen or 3.83% lower at RM2.01 on Friday, giving it a market capitalisation of RM898.62 million. Capital A shares also ended the day down 4 sen or 4.52% at 84.5 sen, valuing the group at RM3.54 billion.

Edited ByIsabelle Francis
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