This article first appeared in The Edge Malaysia Weekly on April 15, 2024 - April 21, 2024
CAPITAL A Bhd, the largest low-cost carrier in Asia, is in talks with investment bankers to assist in a private placement of new shares to third-party investors who have yet to be identified, according to sources.
The Practice Note 17 (PN17) status company is looking to raise between US$300 million (RM1.43 billion) and US$400 million from the private placement, which will be used for business expansion, they say.
Capital A has hired AmInvestment Bank Bhd as its financial adviser to look for new investors for the proposed placement, The Edge has learned.
In a March 4 interview, Capital A CEO Tan Sri Tony Fernandes told The Edge that the group intended to raise US$300 million or US$400 million through equity funding after selling its aviation business to medium-haul affiliate AirAsia X Bhd (AAX). Fernandes also said the group had engaged Citibank and boutique investment bank Evercore Inc to undertake the capital raising for the aviation group.
In January, Capital A announced that it had entered into a non-binding letter of offer with AAX for the proposed disposal of AirAsia Bhd (AAB), which wholly owns Malaysia AirAsia, and AirAsia Aviation Group Ltd (comprising 45%-owned Thai AirAsia, 49%-owned Indonesia AirAsia, 100%-owned AirAsia Philippines and 51%-owned AirAsia Cambodia) in exchange for cash and/or shares, as part of a plan to resolve the low-cost carrier’s financially distressed status. For its part, AAX owns AAX Malaysia and AAX Thailand. Last Tuesday, Capital A and AAX had mutually agreed to extend the negotiation period until end-April.
Capital A hopes the acquisition of its aviation assets by AAX will be completed by June and July, following which Capital A is expected to present a comprehensive plan to lift itself from PN17 status by June 30.
An aviation analyst, who has a “buy” call on Capital A, says its classification as a PN17 company may make it difficult for the group to attract investors for its share placement.
An investment banker, speaking on condition of anonymity, concurs, noting that it will be a huge challenge for Capital A to raise US$300 million to US$400 million, which accounts for 40% to 60% of its market capitalisation of RM3 billion as at April 12.
“The size is very large. While its PN17 status is one of the major issues, we might also ask whether the underlying business is investable. Today, airfares remain high and demand for air travel is still strong. Fundamentally, there will be investors who will bite into its story, but the size of its proposed placement is very big. While Capital A can raise money, whether it can raise that amount is a question mark,” he tells The Edge.
“Still, it is possible, if it has one or two core strategic investors coming in to anchor it. These are likely to be private equity vehicles or high-net-worth individuals with a longer-term view.”
Besides, the share placement will result in a massive dilution to existing shareholders.
Shares in Capital A have fallen 15% so far this year to close at 70 sen apiece last Friday, valuing it at RM2.978 billion. Based on the current market price of 70 sen per share, the group will need to issue two billion new shares, slightly less than half of its existing issued share capital of 4.255 billion shares.
Nonetheless, fewer shares will be issued if the placement is priced higher, and vice versa.
Apart from hiving off its aviation arm to AAX, Capital A has finalised an agreement with Aetherium Acquisition Corp, a special-purpose acquisition company (SPAC), to list Capital A International on the Nasdaq stock exchange. The agreement values Capital A International at US$1.15 billion. The transaction remains subject to regulatory approvals.
“From an investor’s point of view, I would be asking what I am buying into then. Do I buy into the talk that the non-aviation businesses will eventually be bigger than the aviation business?" says the investment banker.
“At the end of the day, Capital A is going to be everything except airlines. Thus, it needs to be able to sell the idea, show the five-year story and how exciting it is going to be.”
Capital A reported a loss for a second straight quarter in the fourth quarter ended Dec 31, 2023 (4QFY2023), on higher operating expenses, financing costs and asset depreciation. Net loss came in at RM160 million and RM178.82 million in 4QFY2023 and 3QFY2023 respectively. However, it managed to post an annual net profit of RM836.99 million in FY2023, from a net loss of RM2.63 billion in the previous year. Revenue grew 129% to RM14.77 billion, from RM6.44 billion in that period.
According to Bloomberg, analysts estimate Capital A will post a weaker net profit of RM406.03 million in FY2024 and RM703.67 million in FY2025.
As at end-December 2023, Capital A had RM703.21 million in deposits, cash and bank balances, while total borrowings stood at RM4.44 billion. It had a shareholders’ equity deficit of RM8.71 billion.
Both Capital A and AAX have common shareholders in Fernandes and Capital A co-founder Datuk Kamarudin Meranun. Both Kamarudin and Fernandes hold an indirect stake of 24.61% in Capital A through Tune Live Sdn Bhd (12.23%) and Tune Air Sdn Bhd (12.4%). Hong Kong businessman Dr Stanley Choi Chiu Fai also owned a 7.98% stake in the group through Positive Boom Ltd.
Meanwhile, the top shareholders of AAX are Kamarudin and Fernandes, who hold 8.94% and 2.69% direct stakes, respectively, in AAX, as well as an indirect stake of 31.59% through Tune Group Sdn Bhd (17.83%) and AAB (13.76%).
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