AirAsia Group (AAGB) has proposed a rights issue of up to RM1.02bn of 7-year redeemable convertible unsecured Islamic debt securities (RCUIDS), on the basis of two RCUIDS with one free warrant for every six AAGB shares currently held. We understand bulk of the proceeds will be used for working capital (50%) and fuel hedging settlement (22%) purposes, while the rest will be for aircraft lease and maintenance expenses and expansion of its digital business. The rights proceeds along with 20% placement and Danajamin scheme (aim to raise RM1.0bn) would raise RM2.4bn within AAGB’s guidance of RM2bn-2.5bn range for new capital. The RM1.0bn rights issue is within expectation and have been factored into our financial model, hence we make no change to our forecast and maintain our Underperform call on AAGB with unchanged target price at RM0.19.

• Proposed Rights Issue. AAGB has proposed to undertake a renounceable rights issue of up to RM1.02bn of RCUIDS. The RCUIDS will be issued on the basis of two RCUIDS with one free detachable warrant for every six AAGB shares currently held. Each RCUIDS will be priced at a nominal value of RM0.75. The RCUIDS come with a 7-year tenure and a profit rate of 8% per year. Each RCUIDS are convertible to one new AAGB share on a one-to-one basis. AAGB shall also redeem 25% of the RCUIDS each year from the fourth year onwards. The warrants’ exercise price expected to be fixed at lower of either RM1, or 20% premium to the trailing 30-day volume weighted average price of AAGB shares prior to the announcement of the entitlement date later.

• Utilisation of proceed. From the proceeds of the exercise, 50% will be used for general working capital, 22% for fuel hedging settlement, 15% for aircraft lease and maintenance payments and 12% for AAGB digital business. Remainder of the proceeds for expenses in relation to the Proposed Rights Issue.

• Our view. We view this fund raising exercise as inevitable to address the near-term cash flow requirement of the Group in response to travel restrictions due to the resurgence of COVID-19. We understand this proposed rights issue serves as an interim measure to address the Group’s current financial concerns as management continues to explore other available options and/or corporate proposals to improve the Group’s capital structure and further strengthen its balance sheet.

Source: PublicInvest Research - 13 Jul 2021