KUALA LUMPUR (April 26): Analysts believe Capital A Bhd's proposed restructuring plan will help the group exit the Practice Note 17 (PN17) status and enhance its competitiveness, as well as provide benefits to AirAsia X Bhd's (AAX) shareholders in terms of free warrants and improved company valuation post restructuring.
With the restructuring plan, the aviation operations for all short, medium, and long hauls will be consolidated under AAX, which in turn will be taken over by a new company — AirAsia Group Sdn Bhd (AAG) — which Hong Leong Investment Bank (HLIB) said will put the company in a much stronger position by strengthening its business model.
"We are overall positive on the exercise, mainly on the streamlining of the aviation segments to be consolidated under AAG, in strengthening the business model for long haul-short haul integration, with a new medium-haul segment as the intermediary, by leveraging onto the new A321 fleets," the research house said in a note on Friday.
"AAG will be in a much stronger position to compete effectively against the established full service carriers, such as SIA (Singapore Airlines), Emirates, JAL (Japan Airlines), etc," it added.
On Thursday, Capital A announced the mechanics of its restructuring plan in its efforts to address its PN17 status. As part of the plan, Capital A proposed to dispose of AirAsia Bhd (AAB), which owns the Malaysian aviation operation, and AirAsia Aviation Group Ltd (AAAGL), which manages the Indonesian, Thai, Philippine and Cambodian operations, for RM6.8 billion to AAX.
AAG will then assume the listing status previously held by AAX after a share swap. Prior to the asset disposals to AAX, a proposed 223.5 million free warrants in AAG will be issued, based on one AAG warrant for every two AAG shares held by existing AAX shareholders.
HLIB noted that post restructuring, Capital A will retain ownership of the four major business segments, namely the maintenance, repair and overhaul (MRO) operations under Asia Digital Engineering (ADE), logistics under Teleport, the AirAsia MOVE SuperApp, and digital finance service BigPay.
Capital A will still own an 18.39% stake in AAG.
"Management intends to continue to grow the four major business segments, and eventually list them in the future. Other businesses include Santan catering services and AirAsia branding," HLIB said.
Under the restructuring plan, HLIB projects that Capital A's equity position could rebound to a minimum of RM492.8 million, with no conversion of outstanding RCUIDS (redeemable convertible unsecured Islamic debt securities) and warrants, or a maximum of RM1.6 billion if the outstanding RCUIDs and warrants are fully converted, enabling it to leave PN17 status.
"Shareholders of Capital A will benefit from it exiting PN17 status, Capital A’s new focus on growth of the aviation support business segments, leveraging onto AAG’s growth and new shareholdings in AAG, to ride on the expected growth of low-cost carriers globally," the research house added.
HLIB maintained its 'buy' call on Capital A, with a higher target price (TP) of RM1.68, from RM1.40 previously, as it sees the group to continue to recover, leveraging onto the improving air travel outlook in the region. "We expect further potential upside to our TP should the PN17 regularisation plan be successfully executed," it added.
'Restructuring plan positive for AAX shareholders as well'
TA Securities is also positive on the deal, contending that the consolidation plan would create synergistic benefits to AAG, as the Malaysian and Thailand segments can tap into AAX's presence in China, Japan, South Korea and Australia, while AAX would benefit from growing in size with increasing bargaining power.
"From the minority shareholders’ standpoint, it would be win-win for all shareholders, as Capital A shares can be lifted from PN17 status, and AAX shareholders will get the free warrants," it said in a note following the announcement of the restructuring plan.
According to TA Securities, Capital A would record a gain from remeasurement of RM2.3 billion from the disposal of AAAGL, and a disposal gain of RM6.1 billion from the disposal of AAB.
However, the research firm noted that Capital A's management had indicated that it may no longer pursue the listing of its intellectual property segment, the AirAsia branding, on Nasdaq via a special purpose acquisition company.
TA Securities maintained its 'hold' call on Capital A, with a TP of 77 sen.
Meanwhile, Maybank Investment Bank noted that the operations of Capital A’s four airlines are a lot more stable than AAX’s, due to resilient demand for the former’s short-haul flights as opposed to AAX’s medium- to long-haul flights.
As such, it opined that AAX may be the surprise winner from the restructuring plan, as the optimised aviation business under the enlarged AAG group is expected to post more stable earnings than AAX currently.
"Thus, we do not discount the possibility that the investing community will ascribe more generous valuation to it.
"We are of the opinion that existing AAX shareholders could be more positively impacted by this development with their more valuable AAG shares and free warrants," Maybank said.
MIDF Research, which maintained its 'neutral' stance on Capital A, with an unchanged TP of 74 sen, also opined that the proposed disposals will optimise the business operations by focusing on aviation services and digital ventures that synergise with and enhance the passenger airlines business.
"The proposed corporate exercises will aid the group in its transition out of PN17 status, with a deadline of June 20, 2024 to submit the plan to Bursa [Malaysia]," it said.
The proposed corporate exercises are anticipated to be completed by the third quarter of 2024, with the regularisation plan expected to be finalised by the first quarter of 2025.
At the time of writing on Friday, shares in Capital A were up 4.5 sen, or 6.43%, at 74.5 sen, after 54.52 million shares were traded. Its market capitalisation stood at RM3.15 billion. Meanwhile, AAX was up 17 sen, or 14.05%, at RM1.38 a share, with a market capitalisation of RM616.96 million, with 16.12 million shares done.