Investment Highlights

• We maintain our SELL recommendation and forecasts, but trim our fair value (FV) to RM0.61 (from RM0.62) for AirAsia based on 8x FY23F EPS, having reflected the dilution from new shares from the acquisition of BigLife. At 8x, we value AirAsia at a discount to its global peers, Ryanair and Southwest Airlines (10x–11x forward PE) to take account of AirAsia’s relatively smaller size. There is a 3% premium to our FV to reflect our 4-star ESG rating (Exhibit 3).

• AirAsia has proposed to issue a 7-year 8% redeemable convertible unsecured Islamic debt securities (RCUIDS) with a nominal value of up to RM1.024bil on the basis of two RCUIDS and one free warrant for every six AirAsia shares held.

• The RCUIDS will be priced at a nominal value of 75 sen and is convertible to one new AirAsia share on a one-to-one basis. The proceeds are mainly earmarked for working capital comprising fuel hedging settlement, aircraft lease and maintenance payments, AirAsia Digital’s expenses, etc. It shall bring AirAsia’s net debt (including lease liabilities) down to RM12.3bil from RM13.3bil currently. As AirAsia currently has a negative shareholder fund, its net gearing is not meaningful.

• Assuming full conversion of the RCUIDS and warrants with illustrative conversion prices of RM0.75 and RM1.00 respectively, AirAsia’s share base will increase by almost 60% to 6,144.4mil shares which will dilute its FY23F EPS by 21% (partially mitigated by interest savings from the RCUIDS proceeds) based on our calculation. Hence, our FV shall fall to RM0.48 based on the same valuation basis.

• The latest development is within our expectations that a massively dilutive cash call is inevitable given AirAsia’s damaged balance sheet in the aftermath of the pandemic. The proceeds will come in handy to sustain its business temporarily.

• The prospects for the air travel industry and airlines, including AirAsia, have improved significantly following the large-scale rollout of Covid-19 vaccines in Malaysia globally. However, depending on how long more it takes before travelling restrictions ease and international borders reopen, it is still difficult to tell if AirAsia will emerge from the current crisis.

Source: AmInvest Research - 13 Jul 2021