CapitalA and AAX EGM questions

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CapitalA and AAX EGM questions

Sslee

Publish date: Sun, 29 Sep 2024, 10:20 PM

Any comment?

will send out later this week.

Dear IR and Tricor,

Below are my submitted questions in advance for the upcoming Capital A Berhad EGM.

Please send a copy to the BOD and External Auditor for them to prepare the answers

Referring Appendix 2 to the Minutes of the 7th AGM ISSUES RAISED BY THE SHAREHOLDERS

Question 4: External Auditor please explain the different FYE 2022 current lease liabilities is RM4,340,844,000 in FYE 2023 why total amount (lease) recognised in profit or loss: RM 2,445,438,000. Payment of lease liabilities in cash flow: RM (2,045,816,000)?

Answer: The FY2022 current lease liabilities include unpaid outstanding lease.

The cash flow in FY2023 represents the actual amount paid by the Group.

The Profit and Loss items relate to interest on lease, depreciation on Right of Use assets and short term lease expense

Question 5: External Auditor what it means by included in lease liabilities are lease rental payables amounting to approximately RM 2,810 million?

Answer: This pertains to the outstanding amounts of lease rental due and payable owing to the lessors that remained unsettled as at 31 December 2023

Question 9: External Auditor, from Sales in advance: RM 2,025,298,000, Proceeds from borrowings: RM 1,273,030,000 yet the Group only managed payment of lease liabilities: RM 2,045,816,000 which is far off the amount of current lease liabilities reported at FYE 2022 RM 4,340,844,000. What happens to the unpaid FYE 2022 current lease liabilities?

Answer: For the due and payable lease payments for FY2022 and prior year, the amount is recorded within trade and other payables in FY2023

Follow up clarification

Clarification Question 1: External auditor, are the answers given on above implied as long as lessors agreed to roll over unpaid lease payment due then the income statement (P&L) accounting recognised only RM 2,445,438,000 (interest on lease, depreciation on Right of Use assets and short term lease expense) instead of the full amount Financial Year Ended 2022 current lease liabilities of RM 4,340,844,000?

Clarification Question 2: Isn’t that distorted the financial income statement and the profit/(loss) for Financial Year Ended 2023?

Question 23: External Auditor, by acquiring the 60% PAA how many billions net liabilities was transferred from PAA to the Group and how many billion negative equity from Non-controlling interest was transferred to shareholders’ equity?

Answer: A total of approximately RM 2.3 billion has been transferred as a result of the acquisition

Question 25: Referring below link:

PART D – ACQUISITIONS AND DISPOSALS

https://www.bursamalaysia.com/sites/5bb54be15f36ca0af339077a/content_entry5ce3b50239fba2627b2864be/5ce3b5c439fba264f32eb401/files/MAIN_Chap10_COI_Ors__26May2023_.pdf?1685095256

External Auditor is acquisition of 60% PAA valuation percentage ratio below 5%, above 5% but below 25% or above 25% as defined by above Bursa Chapter 10: Transactions?

Answer: The valuation percentage ratio falls within the range of 2.24%, this aligns with the criteria outlined in Chapter 10: Transactions of the Bursa Malaysia Listing Requirements

Clarification Question 3: The Group paid USD16 million to acquire 60% PAA from JV local partner F&S Holdings, Inc and resulted in a total of approximately RM 2.3 billion net liabilities was transferred from PAA to the Group/negative equity from Non-controlling interest was transferred to shareholders’ equity and yet the transaction valuation percentage ratio falls within the range of 2.24%. External Auditor please kindly show the calculation how you get this 2.24% valuation ratio?

Question 21: BOD, previously the Group sold India AA to local JV partner and allowed Japan AA local JV partner to wind up Japan AA. What are the reasons the Group paid USD16 million to acquire 60% PAA (Red flagged by external auditor Isla Lipana on “material uncertainty” exists on its ability to continue as a going concern) from JV local partner F&S Holdings, Inc?

Answer: The acquisition of a majority stake in Philippines AirAsia aligns with our Group's strategic focus on the Asean market, where the Philippines has long been recognised as one of our core and strategic market that holds significant growth potential within the region. Despite the challenges highlighted by the external auditor, we firmly believe in the long-term viability of the Philippine aviation industry.

Rest assured, the decision to acquire PAA was made after careful consideration and thorough due diligence, taking into account both the opportunities and risks associated with the investment.

Additionally, post-acquisition, we have gained a 35% market share in the Philippines market. We are confident that the acquisition of PAA will continue to contribute positively to our Group's long-term growth and value creation for our shareholders.

Clarification Question 4: RAMON ROYANDOYAN, Nikkei staff writer July 3, 2024 09:35 JST

MANILA -- Philippine budget airline Cebu Pacific is set to buy up to 152 Airbus jets for $24 billion to expand its fleet and meet recovering demand for flights.

BOD, how is PAA going to compete with the financially stronger and fast expanding Philippine budget airline Cebu Pacific and turnaround PAA?

I drop in a question on the online query box and that question answer was not in the AGM minutes: Will BOD kindly answer that question:

From Aetherium Acquisition Corp Form 10Q:

As of March 31 2024, there were 528,500 shares of class A common stock issued and outstanding, excluding 2,991,003 shares subject to redemption.

On May11, 2021, the sponsor purchased 2,875,000 founder shares (Class B common stock issued and outstanding) for an aggregate purchase price of USD 25,000.

Clarification Question 5: With such low numbers of class A and B shares issued and outstanding, is the merger with CAPI still feasible and possible?

Referring

https://theedgemalaysia.com/node/727957

Capital A can exit PN17 before branding biz carve-out, says Fernandes

The proposed RM6.68 billion disposal of AirAsia Bhd and AirAsia Aviation Group Ltd to AAX will lead to a pro forma gain of over RM18 billion when the transfer of accumulated losses in the aviation business is included, according to Capital A

Congratulations to BOD especially to Capital A chief executive officer Tan Sri Tony Fernandes for coming out with this out of the world deal in getting Capital A exit PN17 status soon.

Question 1: BOD, with pro forma over RM18 billion when including accumulated losses in the aviation business is transferred to AAX. Isn’t that too good a deal and any thought on AAX weighted down by multi-billions of liabilities and its ability not to default on payment of billions in current liabilities?

The branding business, parked under Capital A International, will be able to collect a royalty fee based on the revenue generated by the operating companies over its affiliates’ aviation businesses.

Referring:

PROPOSED BUSINESS COMBINATION AMONG THE COMPANY, AETHERIUM ACQUISITION CORP (“GMFI”), CAPITAL A INTERNATIONAL (“CAPI”), AETHER MERGER SUB INC. (“MERGER SUBSIDIARY”) AND BRAND AA SDN BHD (“BRAND AA”);

Mode of settlement of the Transaction Consideration
The Transaction Consideration will be satisfied via a combination of the following:
(a) the issuance of USD1 billion of new ordinary shares of CAPI (“CAPI Shares”) (“Consideration Shares”) to the Company;
(b) the assumption of a term loan of USD150 million (equivalent to approximately RM710 million) provided by Lender A (“Loan”) to be novated from Asia Aviation Capital Limited (Labuan) (“AACL”), an indirect wholly-owned subsidiary of the Company and the original borrower of the Loan, to Brand AA (“Loan Novation”). Capital A is in the midst of obtaining the approval from the facility agent of the Loan for the Loan Novation

Question 2: BOD, had the term loan of USD150 million already been novated from Asia Aviation Capital Limited (Labuan) (“AACL”), the original borrower of the Loan, to Brand AA?

Question 3: BOD, with such a good deal will Capital A chief executive officer Tan Sri Tony Fernandes put money where his mouth is by converting his holding in RCUIDS into CapitaA shares?

Question 4: BOD, what will happen to CAPITALA-WA (2021-2028) and will there be an adjustment in the exercise price of RM 1.00 and conversion ratio 1:1?

Thank you

Best Regards

Lee Soon Sheng

Dear IR and Tricor,

Below are my submitted questions in advance for the upcoming AAX Berhad EGM.

Please send a copy to the BOD, External Auditor, WYNCORP Independent Adviser and Deloitte for them to prepare the answers

Circular Part 1:

PROPOSED ACQUISITION OF 100% EQUITY INTEREST IN AIRASIA AVIATION GROUP LIMITED HELD BY CAPITAL A BERHAD FOR A PURCHASE CONSIDERATION OF RM3,000.00 MILLION TO BE SATISFIED ENTIRELY VIA THE ALLOTMENT AND ISSUANCE OF 2,307,692,307 NEW SHARES AT AN ISSUE PRICE OF RM1.30 EACH (“PROPOSED AAAGL ACQUISITION”);

From CapitalA FYE 2023 report: Summarised statements of financial position as at 31th December are as follows:

Effective Holding

AAV: IAA: PAA

40.71%: 47.43%: 97.71% (99.66 latest)

FYE 2023: FYE 2023: FYE 2023

RM’000: RM’000: RM’000

Non-current assets: 8,094,574:1,627,381: 908,863

Current assets: 1,831,039: 231,987: 242,429

Non-current liabilities: (6,223,938): (2,283,702): (1,679,148)

Current liabilities: (2,573,670): (1,965,010): (3,205,168)

Net (liabilities)/assets: 1,128,005: (2,389,344): (3,733,024)

Question 1: Is BOD imprudent and extremely generous in paying RM 3 billion for AAAGL that is still PAT negative and with shareholders’ deficit of RM (4,515,397,000) and with total borrowings, debentures and lease liabilities of RM 9,638,715,000?

Question 2: As at 27^th Sept 2024 Mr. Market only valued the whole of CapitalA at RM 4.049 billion. Why pay RM 3 billion just for AAAGL?

As of PAA financial health please referring below news link:

https://bilyonaryo.com/2023/10/23/tony-fernandes-literally-loses-his-shirt-isla-lipana-red-flags-air-asia-philippines-after-hemorrhaging-p14b-in-last-2-years/business/

“Tony Fernandes literally loses his shirt! Isla Lipana red flags Air Asia Philippines after hemorrhaging P14B in last 2 years
BILYONARYO.COM
October 23, 2023
Things are getting turbulent in Tony Fernandes’ Air Asia Philippines (AirAsia) adventure as the budget carrier has taken a nosedive, racking up a jaw-dropping P14 billion in losses over the past two years.

RAMON ROYANDOYAN, Nikkei staff writer July 3, 2024 09:35 JST

MANILA -- Philippine budget airline Cebu Pacific is set to buy up to 152 Airbus jets for $24 billion to expand its fleet and meet recovering demand for flights.

Question 3: BOD, how is PAA going to compete with financially stronger and fast expanding Philippine budget airline Cebu Pacific and turnaround PAA?

Refer to Capital 7^th AGM Q&A

Question: AAV BOD had carried out a proper capital-raising and restructuring plan that put Thai AirAsia on the right footing for growth. BOD, any deadline for Indonesia listing IAA for a proper capital raising and restructuring in order to reset its balance sheet and maintain its listing status?

Answer: The company has formulated strategic plans to address the financial and operational requirements of Indonesia AirAsia. However, at this juncture, we must await the completion of the aviation business disposal before we can proceed with any further actions.

Question 4: BOD what will be the estimated financial commitment/capital-raising and restructuring plan that will put Indonesia AirAsia and Philippine Air Asia on the right footing for growth?

WYNCORP Independent Adviser comment: Proposed AAAGL Acquisition is fair and reasonable and not detrimental to the interest of the non-interested Shareholders of AAX.

Question 5: WYNCORP Independent Adviser how to justify paying RM 3 billion for AAAGL that is still PAT negative, shareholders’ deficit of RM (4,515,397,000) and with total borrowings, debentures and lease liabilities of RM 9,638,715,000 to be fair and reasonable when Mr. Market only valued the whole of CapitalA at RM 4.049 billion as at 27^th Sept 2024?

PROPOSED ACQUISITION OF 100% EQUITY INTEREST IN AIRASIA BERHAD HELD BY CAPITAL A BERHAD FOR A PURCHASE CONSIDERATION OF RM 3,800.00 MILLION TO BE SATISFIED ENTIRELY VIA THE ASSUMPTION BY AAX OF AN AMOUNT OF RM3,800.00 MILLION OWING BY CAPITAL A BERHAD TO AIRASIA BERHAD (“PROPOSED AAB ACQUISITION”)

AAB is still PAT negative and with shareholders’ deficit of RM (1,825,633,000) and with total borrowings and lease liabilities of RM 16,444,286,000?

Refer to Capital 7^th AGM Q&A

External auditor replied on “going concern”

We have assessed the reasonableness of the cash flow projection provided by the management (Note 2.1). The going concern of the Group is dependent on the following:

1. Successful implementation of a Revenue Bond program; and

2. Continuous support from Group's lessors.

Two leading private credit funds, Ares Management Corp and Indies Capital Partners, will provide $200 million of the funding, which will be strategically utilised to reactivate aircraft that were grounded during the pandemic. The remaining $243 million tranche, subscribed by sting aircraft lessors will be used to refinance existing lease liabilities, further strengthening its balance sheet

CapitalA able to roll over current lease liabilities into Bond and save the day for CapitalA

Capital A is very generous and nice to lessors as at 6 months ended 30/6/2024 paid a total of RM (204,192,000 +155,931,000) for non-operating aircraft on the other hand AAX only pay 0.5 cent for every RM 1.00 owed to debtors (Lessors included) during the last debts restructure.

Question 6: BOD, any reasons lessors will give continued support to AAX?

As set out in Section 11.3, Part A of this Circular, our Group will have a pro forma NA as at 31 December 2023 of RM574.97 million and total borrowings, debentures and lease liabilities as at 31 December 2023 of RM 24,492.69 million (gearing ratio of 42.60 times) upon completion of the Proposed Acquisitions.

Question 7: BOD, what will be the current assets and current liabilities upon completion of the Proposed Acquisitions ?

Question 8: BOD, what will be borrowings, debentures and lease liabilities payable:

Not later than 1 year?

Between 1 to 2 years?

Between 2 to 3 years?

Between 3 to 4 years?

Between 4 to 5 years?

Question 9: Can BOD ensure AAX will not default on above payables or AAX will need to issue more bonds to roll over payables?

Question 10: BOD, In the event of a default of payables, could the Board of Directors of both Capital A and AirAsia X potentially face legal repercussions, such as charges of Wrongful or Fraudulent Trading under Section 540 and Section 539 of the Companies Act 2016?

Wrongful Trading

In the CA 2016, an offence of wrongful trading is captured in section 539(3) that:

“…an officer of the company who knowingly was a party to the contracting of a debt had, at the time the debt was contracted, no reasonable or probable ground of expectation, after taking into consideration the other liabilities, if any, of the company at the time, of the company being able to pay the debt, commits an offence…”

Fraudulent Trading

Whereas section 540(1) of the CA 2016 stipulates an offence of fraudulent trading as below:

“If it appears… that any business of the company has been carried on with intent to defraud the creditors of the company or creditors of any other person or for any fraudulent purpose, the Court may declare that any person who was knowingly a party to the carrying on of the business in that manner shall be personally responsible…”

If an offence under section 539(3) has been made out, offenders may be punishable with a maximum imprisonment of 5 years or a maximum fine of RM500,000, or both. Reading together with section 540 of the CA 2016, it is added that the offender may even bear personal liabilities for the payment of the whole or any part of the company’s debt without any limitation of liability upon a court’s declaration

Page 60: 10.4 Goodwill and impairment risk

For illustrative purposes, as set out in the pro forma consolidated statement of financial position of our Group as at 31 December 2023 in Appendix VIII of this Circular, the goodwill and intangible assets upon completion of the Proposed Acquisitions are RM10,090.74 million and RM2,430.84 million respectively, based on the assumptions and parameters stated therein

Question 11: External Auditor, are Non-current assets: Deferred tax assets and Goodwill subjected to yearly impairment?

Question 12: External Auditor will above impairment causing Net Assets into negative and sending AAX into PN17?

Referring

https://theedgemalaysia.com/node/727957

Capital A can exit PN17 before branding biz carve-out, says Fernandes

Refer to page 59: Investment risk

There is no assurance that the anticipated benefits and synergies arising from the Proposed Acquisitions as set out in Section 8.3, Part A of this Circular will be realized or that the New Aviation Group will be able to generate sufficient returns to offset the dilutive effects to our Shareholders arising from the issuance of Consideration Shares.

There is also no assurance that the projected financial performance of the Target Companies will be achieved after the completion of the Proposed Acquisitions.

The aviation businesses of the Target Companies and the New Aviation Group are closely correlated with the level of inbound and outbound travelling and tourism activities at both domestic and international levels and are subject to risks inherent in the aviation industry including:-

(i) changes in the general economic, social and political climate of the country;

(ii) changes in consumers’ spending power, lifestyle and preferences for travel destinations;

(iii) natural disasters (e.g. earthquake, flood, tsunami, typhoon and volcanic eruption), outbreak of diseases and epidemics as well as weather conditions in the locality, country or region;

(iv) threats of terrorism, acts of sabotage, strikes, riots, geopolitical tensions, social unrest and declaration of war;

(v) changes in legislation and government policies;

(vi) negative reviews or adverse publicity affecting the reputation of the airlines, ultimately leading to negative public perception and loss of consumers’ confidence towards the airlines;

(vii) increase in travelling costs as a result of higher airline operating costs arising from, amongst others, escalating fuel prices and depreciating local currencies;

(viii) ability to renew airline operator certificates and other relevant approvals / certifications to comply with the applicable regulations;

(ix) increased competition from other existing or new low-cost airlines;

(x) loss of key senior management and ability to hire replacement; and

(xi) ability to secure new aircraft deliveries for fleet replacement and expansion plans.

Question 13: BOD, the whole deal looks like a one sided deal to get capitalA to exit PN17 without due consideration of survivability and profitability of AAX. May I ask if BOD is under pressure, to complete the above deal?

Question 14: BOD, with above investment risks and uncertainty, the deal will increase NOSH from 447.07 million into 3,639.72 million. Will it be more prudent to reject the deal as current low fuel price and appreciation of RM against USD will make current AAX to generate good EPS without worrying how to pay off total borrowings, debentures and lease liabilities as at 31 December 2023 of RM 24,492.69 million (gearing ratio of 42.60 times) upon completion of the Proposed Acquisitions?

(Appraised using the income approach – DCF method) AAAGL Purchase Consideration and AAB Purchase Consideration are fair and reasonable:

Referring CapitalA 6 months end 30/6/2024

Net cash generated from operating activities: RM 2,009,580,000

Cash flow from financing activities:

Proceeds from borrowings: RM 418,826,000

Repayment of borrowings: RM (143,138,000)

Repayment of lease liabilities: RM (1,792,676,000)

Net cash used in financing activities: RM (1,516,988,000)

Note: under MFRS 16:On the Consolidated Cash Flow Statement, operating lease rental outflows, previously recorded within net cash flow from operating activities, are classified as “net cash flow used in financing activities” for repayment of lease liabilities.

Question 15: WYNCORP Independent Adviser, please confirm with Deloitte is DCF method the cash flow is Net cash generated from operating activities or Net cash generated from operating activities minus Repayment of lease liabilities?

Page 60: 10.3 Projection risk

“The AAAGL Purchase Consideration and AAB Purchase Consideration were arrived at after taking into consideration, amongst others, the range of valuation for the entire equity interests in the Target Companies based on the valuation undertaken by Deloitte. In arriving at the valuation of the Target Companies, the Valuer has considered a number of valuation approaches and adopted the DCF method of valuation as the primary method for the valuation of the AOCs, namely AAB, TAA, PAA and IAA using the 5-year financial projections of the said AOCs from 1 January 2024 to 31 December 2028 together with the underlying bases and assumptions.

There is no assurance that the AOCs will be able to achieve the projected results in the future and that the key underlying bases and assumptions used in arriving at the valuation of the Target Companies will materialise as planned. In the event that the AOCs are unable to achieve the projected results in the future and/or if any of the key underlying bases and assumptions used in arriving at the valuation of the Target Companies does not materialise as planned, the valuation of the Target Companies may deteriorate and the New Aviation Group may be required to recognise an impairment loss on the carrying amount of its investments in the Target Companies (including any goodwill and intangible assets arising from the Proposed Acquisitions) and this may adversely affect the financial performance and financial position of the New Aviation Group.

Question 16: Deloitte, what are the projected: Net cash generated from operating activities, repayment of borrowings, debentures and lease liabilities for each of the 5-year financial projections of the said AOCs from 1 January 2024 to 31 December 2028?

Question 17: BOD since the valuation is based on 5-year financial projection and to eliminate the projection risk should BOD get a 5 years contractual guarantee that capitalA will reimburse AAX on any shortfall to the projection?

Thank you

Best Regards

Lee Soon Sheng