After a recent report from a research house in Hong Kong, AirAsia's share price has plunged by 26.4% since its 1QFY15 results release, on the concerns of its associates' debts. From the conference call held by AirAsia yesterday, their main priorities are to turnaround its associates in Indonesia (IAA) and Philippines (PAA) as well as to collect about RM1bn from the total amount owed by these associates. We are keeping our Outperform call on AirAsia, but at a lower target price of RM2.53 (previously RM3.08) tagged to a 10x PE multiple to FY16 EPS, after adjusting our US dollar rate against RM assumptions to reflect weaker ringgit in FY16F/17F.

To raise new equity at Indonesia (IAA) and Philippines (PAA). Management is in final discussions with its local partners to raise new capital about USD100m for each associate, IAA and PAA from a present level equity of USD13.81m and USD13.28m respectively. On top of that, the Group also expect to raise at least another USD100m from new investors through a subscription of convertible bonds issued from each associate, in this immediate term. The convertible bonds will have a maturity period of 2 years to 2017. In total, about USD400m (c.RM1.1bn) will be raised and expected to be used to pare down its associates' borrowings. As at March 2015, the amount due from the associates are about RM2.76bn. Management is confident on the repayment of RM1bn, part of the amount owed by its associates. At the very least, if they fail to raise the new equity, the repayment of amount owed by the associates will be made within three to five years period. The listing for both IAA and PAA is scheduled to be in 2017 and expected to raise about USD150m from the IPOs. Part of proceeds raised will then also be used to reduce further the amount due from the associates.

Outlook of IAA and PAA. Management believe that both associates in Indonesia (IAA) and Philippines (PAA) will breakeven by end of the year, on the back of higher average fare and improved demand. IAA is currently the market leader for international routes in Indonesia. Currently its load factor is at 74% level, and is expected to achieve 76%/77% level by the end of the year. The management expects PAA to be in a positive cash position and targeting to be profitable in 4QFY15. PAA's load factor currently stands at 77.4%. No new capacity will be added during the year. Its key turnaround plan for PAA is to introduce 2 new international hubs and additional 3 aircraft will be added in the next 3 years.

We are keeping our Outperform call on AirAsia with a lower target price of RM2.53 (previously RM3.08) tagged to a 10x PE multiple to FY16 EPS, after adjusting our assumptions of weaker ringgit from RM3.50 to RM3.70 in FY16F/17F. The Group's performance will still be dependent on competition and volatility of US dollar against RM, nevertheless, we remain optimistic on AirAsia due to lower fuel prices, higher ancillary income and better environment with more rational market in Malaysia.

Source: PublicInvest Research - 18 Jun 2015