Draft: Questions for upcoming Capital A Berhad AGM on 13-Jun-2024

 

Dear IR.

Below are my submitted questions in advance for the upcoming Capital A Berhad AGM.

Please send a copy to the BOD, External Auditor and Company Secretary for them to prepare the answers.

 

Page 120:

The carrying amounts of goodwill and landing rights allocated to the Group’s cash generating units ("CGUs") are as follows:

Goodwill: Landing rights

2023 2022: 2023 2022

RM’000: RM’000: RM’000: RM’000

CGU

BIG: 102,926: 102,926: -: -

IAA: 38,394: 38,394: 374,600: 374,600

PAA: - :- :69,300 69,300

AAAGL: 7,334: 7,334: -: -

BigPay: 5,275: 5,275: -: -

AA.Com: 9,804: 9,804 -: -

Velox: 109,733: 109,733: - :-

AAV: 1,895,293: - :1,986,940 -

2,168,759: 273,466: 2,430,840: 443,900

The recoverable amounts of the CGUs have been measured based on their value in use which is based on calculations using cash flow projections from financial budgets approved by the management covering a five-year period.

 

Page 15:

(b) Impairment assessment of intangible assets

Quote, “Arising from the impairment review, the group impaired goodwill of RM 161 million relating to AAV.” Unquote

 

Question 1: External Auditor, do you agree with the cash flow projections from financial budgets approved by the management on the Goodwill and Landing right intangible assets valuation that gave valuation of AAV Goodwill RM 1,895,293,000: Landing rights RM 1,986,940,000?

 

Question 2: External Auditor, will there be more yearly over RM hundreds of millions impairment of goodwill and landing right for coming years?

 

Page 24: Statements of comprehensive income

For the financial year ended 31 December 2023

2023: 2022

RM'000: RM'000

Net profit/(loss) for the financial year: (96,314): (3,915,817)

Items that may be subsequently reclassified to profit or loss

Cash flow hedges: (3,861): –

Foreign currency translation differences: (961,226): 576,779

Net other comprehensive loss that may be reclassified to profit or loss in subsequent periods: (965,087): 576,779

 

Question 3: External Auditor please explain, under what conditions will net other comprehensive loss RM (965,087,000) be reclassified to profit or loss in subsequent periods?

 

Page 27- 28: Statements of financial position as at 31 December 2023

31.12.2023: 31.12.2022: 1.1.2022

Net current liabilities (12,669,239): (8,509,066): (6,754,176)

Capital and reserves

Share capital:  8,711,742: 8,654,977: 8,457,172

Merger deficit:  (5,507,594): (5,507,594): (5,507,594)

Foreign exchange reserve: 217,047: 1,178,273: 601,494

Accumulated losses: (12,321,978): (10,254,769): (7,094,693)

Reserves: 138,642: 204,020: 161,321

Total shareholders' deficit: (8,762,141): (5,725,093): (3,382,300)

Non-controlling interests: (1,862,596): (3,791,865): (3,040,603)

Total deficit: (10,624,737): (9,516,958): (6,422,903)

 

Question 4: External Auditor based on above financial figures what is your opinion on the Group financial health from 1.1.2022 to 31.12.2022 to 31.12.2023 (improving and healthy or deteriorating into ICU level)?

 

Page: 143. Leases

2023: 2022

RM'000: RM'000

Current: 5,438,692: 4,340,844

Non-current: 13,750,088: 10,717,036

Total: 19,188,780: 15,057,880

The following are the amounts recognised in profit or loss:

2023: 2022

RM'000: RM'000

Depreciation of right-of-use assets: 1,566,935: 1,309,533

Interest expense on lease liabilities: 852,954: 705,152

Expense relating to short-term leases: 25,549: 27,922

Reversal of impairment of right-of-use assets: - : (552,290)

Reversal of impairment of finance lease receivables: - : (98,923)

Total amount recognised in profit or loss: 2,445,438: 1,391,394

The Group had total cash outflows for leases of RM 2,045 million in 2023 (2022: RM 1,200 Million). Included in lease liabilities are lease rental payables amounting to approximately RM 2,810 million (2022: RM 2,282 million)

 

Page 37: Cash flows from financing activities:

2023: 2022

RM'000: RM'000

Proceeds from borrowings: 1,273,030: 1,167,698

Repayment of borrowings: (396,936): (309,485)

Payment of lease liabilities: (2,045,816): (1,171,914)

Net cash used in financing activities: (1,169,722): (313,701)

 

Question 5: External Auditor please explain the different FYE 2022 current lease liabilities is RM 4,340,844,000 in FYE 2023 why total amount (lease) recognised in profit or loss: RM 2,445,438,000. Payment of lease liabilities in cash flow: RM (2,045,816,000)?

 

Question 6: External Auditor what it means by Included in lease liabilities are lease rental payables amounting to approximately RM 2,810 million?

 

Referring: under MFRS 16:

(i) On the Consolidated Income Statement, expenses which were previously included under aircraft operating leases will be replaced by finance costs – lease liabilities and depreciation of right of use asset;

(ii) On the Consolidated Cash Flow Statement, operating lease rental outflows, previously recorded within net cash flow from operating activities, are classified as “net cash flow used in financing activities” for repayment of principal of lease liabilities.

 

The Late Charlie Munger's Best Quote “I think that, every time you saw the word  EBITDA", you should substitute the word "bulls**t" earnings.”

 

Question 7: External Auditor can you please explain what Charlie Munger is trying to say on EBITDA?

 

Question 8: BOD why every quarter presented the beautiful EBITDA figure without stating “under MFRS 16: On the Consolidated Income Statement, expenses which were previously included under aircraft operating leases will be replaced by finance costs – lease liabilities and depreciation of right of use asset”

 

Page 12: External Auditor Going Concern Assessment:

Quote, “The Group reported a loss for the year of RM 96 million whilst the Company reported a loss for the year of RM 1,960 million, for the financial year ended 31 December 2023. The group and the Company reported net operating cash flow of RM 1,413 million and RM 72 million respectively. As at 31 December 2023, the group current liabilities exceed its current assets by RM 12,699 million. In addition, as at 31 December 2023, the Group reported a negative shareholders’ funds of RM 8,762 million.” unquote 

 

Question 9: External Auditor if total cash outflows for leases RM 2,045 million under financing activities is moved back to previously recorded within net cash flow from operating activities what will be FYE2023 net operating cash flow?

 

Question 10: External Auditor, from Sales in advance: RM 2,025,298,000, Proceeds from borrowings: RM 1,273,030,000 yet The Group only managed payment of lease liabilities: RM 2,045,816,000 which is far off the amount of current lease liabilities reported at FYE 2022 RM 4,340,844,000. What happens to the unpaid FYE 2022 current lease liabilities?

 

“Going Concern Assessment” (Refer page 12-13).

Quote, “Management had prepared a cash flow forecast as part of the assessment on whether the Group and the company will be able to continue as a going concern.” Unquote

 

Question 11: BOD, FYE 2023 current lease liabilities is RM 5,438,692,000. What were the projected FY 2024 total amount (lease) recognised in profit or loss and amount payment of lease liabilities in cash flow from financing activities?

 

Question 12: External Auditor looking back on FYE 2022 Management cash flow forecast on going concern is that cash flow forecast fulfilled as at FYE 2023 audited financial result?

 

Question 13: External Auditors if FYE 2022 Management cash flow forecast is far off the mark as per actual achieved then as at 31 December 2023, the group current liabilities exceed its current assets by RM 12,699 million. Are Auditors satisfied and confident with management's cash flow forecast for year 2024 that the group will not default on the net current liabilities of RM 12,699 million?

 

From Q4 FY 2023 quarterly report:

Lease liabilities

The lease liabilities amounting to RM 18.7 billion includes deferred aircraft leases of approximately RM 2.3 billion. The lease liabilities are supported by ROU assets of RM 12.1 billion.

The Group had completed the restructuring of a total of 161 aircraft leases up to the date of this report including the waiver of lease rentals in arrears, as well as reducing future lease rates with a corresponding longer lease term, where necessary, and return of aircraft.

 

Question 14: BOD currently the Group has how many aircraft lessors? Will BOD kindly list down the aircraft lessors/lease companies the amount: lease liabilities owed, lease deferred, lease rental in arrear waive, future lease rate reduce with corresponding longer lease term and return of aircraft?

 

Question 15: BOD any management or BOD team member/members has/have direct or indirect vested interest in The Group’s aircraft lessors/lease companies?

 

Page 40: Funding

The Group is currently engaging in discussion with lenders at different stages for debt and equity fundraising, with an estimated amount of RM3 billion. As at the date of this report, the Group has received commitment from investors for a Revenue Bond Program of up to USD365 million (equivalent to RM1.68 billion)

The Revenue Bond program entails the conversion of outstanding lease payments of USD240 million (approximately RM1.1 billion) into bond (Tranche 1) and cash inflow of approximately USD125 million (approximately RM575 million) (Tranche 2) to finance working capital, maintenance cost and lease rentals. The revenue bond will be secured against passenger seat sales from identified routes and shares in a subsidiary. Tranche 1 of the Revenue Bond has a tenure of 2.5 years whereas Tranche 2 has tenure of 4 years. The bond is expected to be issued by mid of 2024.

 

Question 16: BOD what are the reasons aircraft lease companies/lessors demand for the conversion of outstanding lease payments of USD240 million (approximately RM1.1 billion) into bond (Tranche 1)?

 

Page 13: Going Concern Assessment;

Quote, “Critical to the going concern assessment are the Directors’ expectations of continuous support from the Group’s aircraft lessors” unquote

 

Question 17: BOD is the move by lessors for the conversion of outstanding lease payments of USD240 million (approximately RM1.1 billion) into bond (Tranche 1) a sign of lessors losing their confidence in the Group ability to pay the outstanding lease payment?

 

Referring below Q1 2023 presentation

Well positioned for growth with a total of 362 aircraft in order book to be delivered in the next 12 years. 73 aircraft have already been secured financing through Sales and Leaseback (SLB) arrangements with several lessors.

 

Question 18: BOD what is the latest status on the above?

 

Referring below news link:

https://bilyonaryo.com/2023/10/23/tony-fernandes-literally-loses-his-shirt-isla-lipana-red-flags-air-asia-philippines-after-hemorrhaging-p14b-in-last-2-years/business/

“Tony Fernandes literally loses his shirt! Isla Lipana red flags Air Asia Philippines after hemorrhaging P14B in last 2 years
BILYONARYO.COM
October 23, 2023
Things are getting turbulent in Tony Fernandes’ Air Asia Philippines (AirAsia) adventure as the budget carrier has taken a nosedive, racking up a jaw-dropping P14 billion in losses over the past two years.

Isla Lipana & Co., the auditing firm, isn’t pulling any punches and is openly questioning whether Fernandes can navigate AirAsia through financial storm clouds.

In the firm’s latest annual report, Isla Lipana said AirAsia’s massive losses -P7.9 billion in in 2022 and P6.4 billion in 2021 – which have pushed its capital deficiency to P39.9 billion or 60 times its original capital.

Beyond these losses, AirAsia is grappling with unpaid obligations to creditors and aircraft lessors.

As of 2022, AirAsia is mired in a liability quagmire, with P11 billion in dues and demandable payments and another P24 billion due within a year.

The airline’s struggle to meet its obligations predates the pandemic. In 2018, it failed to meet financial commitments related to a P1.78 billion loan from BDO Unibank. The carrier managed to postpone payments to BDO as well as restructure its lease contracts with aircraft suppliers.

Isla Lipana said these figures indicate that a “material uncertainty” exists on its ability to continue as a going concern.

The PWC affiliate’s audit showed AirAsia’s cash reserves at a dangerously low P84 million; unpaid refunds to consumers at P774 million; and payables to suppliers rising 18 percent year-on-year to P16.9 billion.

 

AirAsia’s parent company, Malaysia’s Capital A, submitted a letter to Isla Lipana mapping out a plan to lift the carrier out of its deep financial hole.

 

This plan involves expanding operations in Japan, China, and Hong Kong, increasing agent numbers, introducing new products, maximizing cargo-related profits, improving yields and take-up rates, and stringent cost controls.

 

Isla Lipana, however, remained steadfast in its assessment, with the auditing firm stating, “Our opinion remains unchanged on this matter” in a report dated May 2023”

 

Question 19: External Auditor, do you agree with PAA External Auditor Isla Lipana opinion on PAA FYE 2022 audited financial account of “material uncertainty” exists on its ability to continue as a going concern?

 

Page 109: PAA

2023: 2022

RM'000: RM'000

Non-current assets: 908,863: 709,801

Current assets: 242,429: 357,235

Non-current liabilities: (1,679,148): (1,021,560)

Current liabilities: (3,205,168): (3,100,251)

Net (liabilities)/assets: (3,733,024): (3,054,775)

 

Question 20: External Auditor looking at the above PAA FYE 2022 and FYE 2023 financial figures above, is PAA financial health improving or deteriorating from FYE 2022 to FYE 2023?

 

Question 21: BOD have you read the PAA FYE 2023 auditor report? What is the External Auditor of PAA opinion on PAA FYE 2023 audited financial account?

 

Page 105: 

On 16 May 2023, AA Com Travel Philippines, Inc (“ACTP”) a subsidiary of the Group, entered into a Share Sale and Purchase Agreement (“SPA”) with F&S Holdings, Inc. to acquire the remaining 3,585,063 shares of AirAsia, Inc. (“AAI”), the parent company of Philippine AirAsia, Inc. (“PAA”), representing 60% of the total outstanding shares, for a consideration of USD 16 million (approximately RM 75 million). Effectively, AAI and PAA became wholly owned subsidiaries of the Group.

 

Question 22: BOD previously The Group sold India AA to local JV partner and allowed Japan AA local JV partner to wind up Japan AA. What are the reasons The Group paid USD 16 million to acquire 60% PAA (Red flagged by external auditor Isla Lipana on “material uncertainty” exists on its ability to continue as a going concern) from JV local partner F&S Holdings, Inc?

 

Question 23: BOD any management or BOD team member/members has/have direct or indirect vested interest in former PAA JV partner F&S Holdings, Inc?

 

Page 27- 28: Statements of financial position as at 31 December 2023

31.12.2023: 31.12.2022: 1.1.2022

Net current liabilities (12,669,239): (8,509,066): (6,754,176)

Capital and reserves

Share capital:  8,711,742: 8,654,977: 8,457,172

Merger deficit:  (5,507,594): (5,507,594): (5,507,594)

Foreign exchange reserve: 217,047: 1,178,273: 601,494

Accumulated losses: (12,321,978): (10,254,769): (7,094,693)

Reserves: 138,642: 204,020: 161,321

Total shareholders' deficit: (8,762,141): (5,725,093): (3,382,300)

Non-controlling interests: (1,862,596): (3,791,865): (3,040,603)

Total deficit: (10,624,737): (9,516,958): (6,422,903)

 

Question 24: External Auditor, by acquiring the 60% PAA how many billions net liabilities was transferred from PAA to The Group and  how many billion negative equity from Non-controlling interest was transferred to shareholders’ equity?

 

Referring CG report 2023

Page 13: Intended Outcome: The board is committed to promoting good business conduct and maintaining a healthy corporate culture that engenders integrity, transparency and fairness.

The board establishes a Code of Conduct and Ethics for the company, and together with management implements its policies and procedures, which include managing conflicts of interest, preventing the abuse of power, corruption, insider trading and money laundering.

 

Question 25: Company Secretary with billions of net liabilities/billion in negative equity transferred from PAA/Non controlling interest to The Group/Shareholders did the BOD commit a breach of company’s Code of Conduct and Ethics on integrity, transparency and fairness?

For not immediately voluntarily announce the acquisition and published

(a) The details of the consideration;

(b) The particulars of the transaction; and

(c) A statement that the directors, major shareholders or persons connected with them have no interest, direct or indirect, in the transaction. 

 

Referring below link:

PART D – ACQUISITIONS AND DISPOSALS

https://www.bursamalaysia.com/sites/5bb54be15f36ca0af339077a/content_entry5ce3b50239fba2627b2864be/5ce3b5c439fba264f32eb401/files/MAIN_Chap10_COI_Ors__26May2023_.pdf?1685095256

 

Question 26: External auditor is acquisition of 60% PAA valuation percentage ratio below 5%, above 5% but below 25% or above 25% as defined by above Bursa Chapter 10: Transactions?

 

Referring CG report 2023

Page 10: Practice 1.5

The board is supported by a suitably qualified and competent Company Secretary to provide sound governance advice, ensure adherence to rules and procedures, and advocate adoption of corporate governance best practices.

 

Question 27: Company Secretary, did BOD commit any offence in acquisition of 60% PAA under Company Act 2016 director fiduciary duty, Bursa rules and regulation Chapter 10: Transactions or offences under any other acts?

 

Page 109: Summarised statements of financial position as at 31 December are as follows:

AAV: IAA

FYE 2023: FYE 2023: FYE 2022

RM’000: RM’000: RM’000

Non-current assets: 8,094,574:1,627,381: 1,409,615

Current assets: 1,831,039: 231,987: 116,294

Non-current liabilities: (6,223,938): (2,283,702): (1,992,676)

Current liabilities: (2,573,670): (1,965,010): (1,458,377)

Net (liabilities)/assets: 1,128,005: (2,389,344): (1,925,144)

 

Group effective holding 40.71% AAV listed in Thailand and effective holding 47.43% IAA listed in Indonesia. Both listed entities are governed by respective countries on listing and capital requirement and corporate Governance.

 

Question 28: AAV BOD had carried out a proper capital-raising and restructuring plan that put Thai AirAsia on the right footing for growth. BOD, any deadline for Indonesia listing IAA for a proper capital-raising and restructuring in order to reset its balance sheet and maintain its listing status?

 

Page 105:

On 31 May 2023, AAGL entered into a Master Brand Licensing Agreement (“MBLA”) with AirAsia Berhad (“AAB”) and also a Brand Sub Licensing Agreement (“SBLA”) with Thai AirAsia Co., Ltd (“TAA”) and Asia Aviation Public Company Limited (“AAV”), the parent company of TAA. Effective from 1 January 2023, the effective date specified in the SBLA, TAA has to comply with the branding and operation requirements and recommendations made by AAGL under the SBLA. Pursuant to this, AAGL has the power to direct the relevant activities of AAV and in accordance with MFRS 10, AAV, as a parent company of TAA, is therefore, deemed as a subsidiary of AAGL for accounting purposes effective from 1 June 2023.

 

Referring:

Information on Brand AA and AirAsia Brand

Brand AA is the registered proprietor for all the rights in the AirAsia trade name and brand image ("AirAsia Brand") as well as a portfolio of other owned trademarks or intellectual property and is principally involved in the brand management of said brand and portfolio.

 

In consideration of Brand AA providing reasonable know how, advice and guidance relating to the implementation of and/or adherence to the guidelines relating to the AirAsia Brand and operating requirements in relation to the aviation businesses, Brand AA is entitled to collect the royalties fee based on all the revenue generated by the airline operating companies (“AOC”) in relation to its affiliates’ aviation businesses and based on the royalty fee rate as set out below:

AOCs Royalty fee rate: %

AirAsia Aviation Group Limited: 1.0

AOCs which have executed the Brand Sub-Licensing Agreement:

(i) AirAsia Berhad (“AAB”)

(ii) Thai AirAsia Co Ltd

(iii) PT Indonesia AirAsia

(iv) Philippines AirAsia Inc

AirAsia X Berhad 0.5

Thai AirAsia X Co Ltd 1.5

 

Question 29: BOD, if before newly acquired company Brand AA Sdn Bhd (formerly known as ADD Data Sdn Bhd) and signing of Master Brand Licensing Agreement (“MBLA”) with AirAsia Berhad (“AAB”) and also a Brand Sub Licensing Agreement (“SBLA”) no royalty fees was paid to The Group. May I know who signed the Brand Licensing Agreement on behalf of?

(i) Thai AirAsia Co Ltd royalty fees rate 1.0%

(ii) PT Indonesia AirAsia royalty fees rate 1.0%

(iii) AirAsia X Berhad royalty fees rate 0.5 %

(iv) Thai AirAsia X Co Ltd royalty fee rate 1.5 %

 

Question 30: BOD, what are the reasons BOD of these independent listed companies readily agreed to pay royalty fees?

 

Question 31: Since these listed companies are listed in Thailand, Indonesia and Malaysia, is it legal for these listed companies BOD not to act in the best interests of the listed companies but has to comply with the branding and operation requirements and recommendations made by AAG (example paying royalty fees that was not imposed before)?

 

Referring recent announcement of divestment of The Group aviation to AAX

https://theedgemalaysia.com/node/709489

The divestment of AirAsia Aviation Group Ltd (AAAGL) is expected to give rise to a pro forma gain of RM4.69 billion to Capital A, while the disposal of AirAsia Bhd (AAB) would result in a gain of RM6.07 billion

 

I’m afraid the deal is a zero sum game. What The Group gains is AAX losses: AAX after the acquisition of AAAGL and AAB the total borrowing and lease liabilities is RM 23,271,794,000 gearing 23.96 times.

 

Question 32: External Auditor what is the likelihood that AAX/New Aviation Group default on payment on current liabilities: Lease liabilities, borrowing, aircraft maintenance, trade and other payables, etc?

 

Question 33: Company Secretary If a default happens; will the BOD of both CapitalA and AAX end up in jail for offences of Wrongful/Fraudulent trading under Company Act  2016 section 540 and Section 539?

 

Wrongful Trading
In the CA 2016, an offence of wrongful trading is captured in section 539(3) that:
“…an officer of the company who knowingly was a party to the contracting of a debt had, at the time the debt was contracted, no reasonable or probable ground of expectation, after taking into consideration the other liabilities, if any, of the company at the time, of the company being able to pay the debt, commits an offence…”

Fraudulent Trading
Whereas section 540(1) of the CA 2016 stipulates an offence of fraudulent trading as below:
“If it appears…that any business of the company has been carried on with intent to defraud the creditors of the company or creditors of any other person or for any fraudulent purpose, the Court may declare that any person who was knowingly a party to the carrying on of the business in that manner shall be personally responsible…”

If an offence under section 539(3) has been made out, offenders may be punishable with a maximum imprisonment of 5 years or a maximum fine of RM500,000, or both. Reading together with section 540 of the CA 2016, it is added that the offender may even bear personal liabilities for the payment of the whole or any part of the company’s debt without any limitation of liability upon a court’s declaration

 

Question 34: If capital A needs to be delisted from Bursa to get more time and space to do a proper capital-raising and restructuring plan and relist in the future, will BOD do so rather than a rush job that might land everyone in a bad place?

 

Thank you

Have a good day

 

Best Regards

Lee Soon Sheng