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Monday, December 19, 2016

Brokers Report: AirAsia - Another Equity Injection For IAA

Retain neutral with  target price (TP) of RM2.50

AirAsia announced that the Board of Directors of AirAsia has considered and approved the subscription of up to IDR3,042bn (c.RM1.0bn) of perpetual capital securities to be issued by its 49%-associate in Indonesia AirAsia (IAA). The subscription would be done via conversion of existing amount due by IAA to the Group. This is the second equity injection in IAA to address the issue of the negative equity balance. We has adjusted the conversion of the debt by reducing the amount due and increased its investment in IAA. Our earnings estimate are however unchanged. We maintain our Neutral call and PE-based target price on AirAsia of RM2.50, based on enlarged share capital that includes the proposed share placement to Tune Live Sdn Bhd which is expected to complete by 1QFY17.
  • To recap. Airlines operators in Indonesia were expected to maintain a positive equity position, as the new regulation was established by the Directorate General of Civil Aviation of the Republic of Indonesia (DGCA) since last year. This is to maintain the standard safety levels of the airlines. Failure to abide with the requirement, the new route approvals would be rejected by the Ministry of Transport or worst case suspending the airline operations. In October 2015, the first perpetual securities was issued by IAA amounting to IDR4.2trn (c.RM1.3bn), of which IDR2,058bn (c.RM624m) was subscribed by the Group, through a debt conversion.
  • Equity subscription details. The amount of new perpetual capital securities subscription by AirAsia would amount to IDR3,042bn (c.RM1.0bn), through a conversion of the debt by IAA to the Group. This is the second equity injection into IAA, to address the negative equity balance of IDR2.2trn as at September 2016. The Board has also approved to align the periodical annual interest distribution rate from 12% in the first perpetual securities subscription to an initial periodic distribution rate of 2% per annum for the first year. Subsequently, the annual distribution rate is increased to 8% of the outstanding principal amount until the first call date, which is at the end of 7th year from the issuance date. After the 7th year, the rate will then step-up to 13% per annum.
  • IAA performance. For 9MFY16, IAA reported a net profit of IDR445.2bn (c.RM148m), after including an additional audit adjustments for FY15 amounting to IDR710bn of deferred tax income. The performance is expected to improve in 4Q16 and 1Q17 on the back strong demand due to year-end holidays and festivities, which will improve its load factor and its average fare.

Source: PublicInvest Research - 19 December 2016

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