Investment Highlights

• We maintain our SELL recommendation, forecasts and fair value (FV) of RM0.66 for AirAsia based on 10x FY22F EPS. At 10x, we value AirAsia at a discount to its global peers, Ryanair and Southwest Airlines (16x–34x forward PE) to reflect AirAsia’s relatively smaller size.
   
• AirAsia has proposed a private placement of up to 669.4mil new shares, which is equivalent to 20% of its existing share base of 3,342.0mil shares at an indicative issue price of RM0.68/share. The RM454mil proceeds from this exercise are mainly earmarked for working capital (i.e. fuel hedging settlement, aircraft lease and maintenance payments, AirAsia Digital’s expenses, etc.).
   
• We estimate that the proceeds will increase AirAsia’s gross cash balance of RM618mil as at 30 Sept 2020 to RM1.1bil. However, factoring in the cash burn since 30 Sept 2020, we believe the number will be significantly lower. The fresh capital shall turn AirAsia’s net debt (including lease liabilities) and net gearing (including lease liabilities) of RM11.8bil and 10.0x as at September 2020 to RM11.4bil and 6.9x.
   
• Meanwhile, based on our calculation, the new shares will dilute its FY22F EPS by 10% as a 20% expansion in the share base more than offset an 8% earnings enhancement arising from interest savings (based on an interest rate of 5%). Assuming the deal is to be completed, our FV shall fall to RM0.59 based on the same valuation basis.
   
• We are only mildly positive on the latest move by AirAsia. We see it as a stop-gap measure to bring itself from the brink. Depending on how soon Malaysia and the world at large are to emerge from the pandemic, AirAsia may need to raise more fresh capital, including potentially a debtto-equity swap for creditors (that is also highly dilutive to its existing shareholders) to ensure its long-term survival.
   
• While the prospects for the air travel industry and airlines have improved significantly following the large scale rollout of Covid-19 vaccines globally, we are still mindful of the urgent need for airlines, including AirAsia, to recapitalize their balance sheets. For AirAsia, the process has just begun.

Source: AmInvest Research - 22 Jan 2021