Capital A Bhd’s (Capital A) announced its proposed plan to regularise its financial position, which includes a capital reduction of up to RM6bn to set off against the accumulated losses of the Group. This aims to facilitate Capital A’s exit from its Practice Note 17 (PN17) status, and enable future growth and strategic expansion, following the disposal of its aviation business to AirAsia X (AAX). We are positive with the restructuring plan as it outlines a clear pathway to turn around its operations. Additionally, the group is expected to benefit from favorable factors such as Ringgit appreciation, robust air travel demand, and lower jet fuel prices. Therefore, we upgrade our call to an Outperform with target price of RM1.57 based on sum-of-parts valuation.

• Proposed Capital Reduction. The Group has proposed a capital reduction of up to RM6bn as part of its plan to regularise its financial condition. This aims to restore the Group’s financial health and facilitate the upliftment of its PN17 status. The exact quantum of share capital to be reduced will depend on the accumulated losses and the resultant issued share capital of the company after the completion of the aviation business disposal to AAX.

• Recap. In Oct 2024, minority shareholders of both Capital A and AAX approved Capital A’s disposal of its aviation business to AAX for a combined value of RM6.8bn, consisting of RM3.8bn in AAX shares and RM3bn in debt novation from Capital A to AAX.

• Scrap SPAC deal. Capital A has terminated the Business Combination Agreement (BCA) between Aetherium Acquisition Corp and Capital A International for a planned SPAC listing in the US, which was intended to unlock the value of its branding business. The decision was made after Aetherium received a delisting determination from NASDAQ in June 2024.

• Sum-of-parts Valuation. We have ascribed a valuation of RM6.8bn to the aviation business and RM4.8bn to other businesses (aviation MRO, in-flight catering, super-app, logistics, fintech, brand management) based on previously undertaken transactions. While still some way off from fully rehabilitating the airline business, we have now turned optimistic on Capital A’s prospects and upgrade our call to Outperform. Our valuation is appended in Table 4.

Source: PublicInvest Research - 24 Oct 2024