AirAsia X (AAX) held a briefing last Friday to provide updates on the progress of its turnaround plan. Overwhelming support by the scheme creditors the previous week exceeds market expectations, which provides the Group a much-welcome relief in now being able to look forward. The debt restructuring will cut the Group’s gearing levels to zero and enable it to start on a clean slate. With the fund-raising exercise expected to be completed by 1Q2022, the Group would have raised adequate funds to resume its operation to all destinations in selected markets by end of 2022. The Group also plans to focus on cargo-driven routes to mitigate uncertainties caused by the current pandemic and/or other potential passenger-carrying eventualities. Such flights undertaken by the Group in the past two quarters with little or no passengers has proven to be economically viable, with a much leaner cost structure. In the last 18 months during the worst (presumably) of the pandemic, cargo revenue has helped narrow losses of airlines. Going forward with the pandemic under better control, financials of airlines will be a lot better. The business model is substantiated. We revise our forecast for the Group to reflect the significant progress on the Group’s turnaround plan, lower cost structure as well as higher contribution from air cargo business. We upgrade our call from Neutral to Outperform with TP of RM0.13 based on 4x EV/EBITDA of FY23E. Do note that shareholder will likely have to go through the entire corporate exercise (rights issue) to see the full benefits of the turnaround plan.

• Turnaround Plan. AirAsia X (AAX) had been significantly impacted by the Covid-19 pandemic as travel and border restrictions were imposed around the world, leading to a significant fall in demand for international air travel. As a result of the pandemic, AAX has grounded most of its fleet since March 2020, facing severe liquidity constraints to meet debt and other financial commitments and had been faced with possible liquidation. To transform and reset its business, AAX initiated a turnaround plan which consists of a (i) Proposed Debt Restructuring, (ii) Proposed Corporate Restructuring and (iii) Proposed Fundraising, to attain a sustainable debt structure and pave way for fresh capital to restart its operations when international borders re-open.

• Proposed Debt Restructuring Exercise. On 6 Oct 2020, AAX announced an exercise which involves a debt settlement and waiver for the debts owing to the scheme creditors pursuant to Section 366 of the Companies Act 2016. On Feb 2021, AAX obtained a court order to convene a creditor’s meeting. Under the Proposed Debt Restructuring Exercise, scheme creditors are classed into 3 categories namely Class A (the secured creditors), Class B (the unsecured creditors) and Class C (Airbus). The provisional scheme amounts have been estimated at RM33.65bn. As part of the deal, Airbus has agreed to reduce AAX’s order to 15 A330neos and 20 A321XRL jets from 78 and 30 respectively previously.
  Pursuant to this, AAX received support from creditors across three groups at a Scheme Creditors Meeting on 12 November 2021 who voted in favour of the Proposed Debt Restructuring to restructure RM33.65bn of liabilities. Creditors have agreed to the restructuring that will see it receive 0.5% of debt owned and existing contracts cancelled. The 0.5% of debt owed to each creditor will be paid from operating cash flow one year after the restructuring goes into effect. In addition, the Class A and Class B creditors will be entitled to an annual profit-sharing mechanism which will be based on 20% of the excess over RM300m of Earnings before interest, taxes, depreciation, amortization and lease rentals (EBITDAR) for 4 years from 2023 to 2026. AAX will have no gearing upon completion of the debt restructuring exercise.

• Proposed Corporate Restructuring. Upon presentation for Court sanction, AAX will implement a Proposed Corporate Restructuring which consists of a Proposed Share Capital Reduction and Proposed Share Consolidation to pave the way for the Group to raise funds. The Proposed Share Capital Reduction involves the reduction of 99.9% of the issued share capital of AAX, cancelling paid-up share capital which is lost or unrepresented by available assets. The credit arising from this exercise will be used to offset the accumulated losses. The Proposed Share Consolidation will consolidate 10 existing shares of AAX into 1 consolidated share, which in effect will increase the trading price of AAX shares because of a reduced number of AAX shares.

Source: PublicInvest Research - 22 Nov 2021