​​Company Background:

 FKA AirAsia Bhd, the company was first established as full-service carrier under government-owned DRB-Hicom in 1993 before present founders Tony Fernandes and Kamarudin Meranun took over the airline in 2001 at token sum of RM1, and repositioned the Group as a budget carrier starting 2002. Together, they built AirAsia into the largest Pan-Asia Pacific budget carrier with a focus in short-haul flights. Mgmt. renamed the firm Capital A in 2022 to reflect the growing diversity of its business segments, as it expand beyond its airlines business to include MRO, catering, freight, payment system, and etc.

 The Group entered into financial difficulties starting 2020 due to Covid-19 pandemic as well as stronger USD (which is negative on its OPEX and borrowings). It first triggered the PN17 criteria in July 2020 when the auditor indicates potential financial distress, and was officially classified by the Stock Exchange as PN17 in Jan 2022.

 Mgmt. is now undertaking a restructuring plan which will involve the disposal of all its airline businesses under AirAsia Group Limited (holding its controlling minority stake in Philippines AirAsia, Asia Aviation PCL, Indonesia AirAsia, and AirAsia Cambodia) and AirAsia Bhd (the Malaysian aviation business) to its sister company AirAsia X. Shareholders have approved the related party transaction in Oct 2024.

 As part of the disposals, Capital A will receive RM3.0b consideration for AAGL via a share swap with AAX, pricing AAX shares @ RM1.30 (significant discount against prevailing share price) and also a RM3.8b debt write-off on amount owing by Capital A to AirAsia Bhd. Capital A will the distribute 73.3% of its holdings in AAX (2.3b shares) to its own shareholders. Earlier disclosure by mgmt. to the Stock Exchange indicate that Capital A will realise a gain on disposals amounting to RM10.8b, which should be sufficient to return Capital A’s book equity to the black.

 Post-restructuring, Capital A’s remaining business segments would be Engineering (MRO), Move (its super app), Teleport (logistics), BigPay (payment system) and Santan (inflight catering). As of FY23, all these segments are reporting positive EBITDA except for BigPay. In terms of book equity, only Engineering and Santan reported positive book equity value at end FY23. We believe there is positive equity value for all segments considering that most have positive EBITDA, except for Teleport and BigPay.

Economic Moats & Sustainability of Value Creations

 #1 Asia Budget Carrier conveys substantial scale benefits to drive cost advantages . Mgmt. has built AirAsia Group to be the largest and most recognised budget carrier in Asia, with a fleet of 212 fleet of Airbus aircrafts (of which 168 was operating at end-2QFY24). This conveys significant scale benefits to aircraft procurement, marketing, repairs & maintenance pilot and crew training, fuel procurement, which in addition to the strong focus on operational efficiency (short flight turnaround, optimise flight patterns) confers substantial cost advantage to AirAsia relative to peers.

 Multiple AOC in different countries enable access to domestic air routes to create stronger network, aided further by cheap cost hub in Malaysia. Malaysia aside, AirAsia also possess AOCs in Thailand, Indonesia, Philippines, and Cambodia which allows the Group to access the domestic air routes in those countries, in addition to having direct international flight routes from those countries. This creates a vast network in which AirAsia can deploy its aircrafts, to ensure for seamless connectivity for passengers to all major destinations in ASEAN and North Asia, which will be a significant competitive advantage. Regional hub centered in Kuala Lumpur, Malaysia is also an added an advantage given the low passenger tax and no transit fee, enabling the Group to price its flights more competitively for passengers flying in/out or transiting in KL.

 Entirely Airbus fleet to benefit from Boeing safety issues. Global passenger airlines fleet is a duopoly with market share largely held between Boeing and Airbus. Capital A operates an entirely Airbus fleet, as it seeks to leverage on stronger bargaining power (via bulk orders) to reduce purchase cost, while streamlining parts inventory (for repair & maintenance) and training. With Boeing being dogged by safety issues resulting in adverse reputation and aircraft grounding, this could have a positive implications for Capital A, as: (1) some customers may prefer to fly on an Airbus aircraft; and (2) competitors’ capacity may be curtailed by any grounding of Boeing aircrafts.

Investment Catalysts:

 Strong tailwinds driving the airlines business – Highly levered balance sheet for the airlines business is expected to ease on the back of forex translation gains (driven by stronger MYR vs USD), with falling rate environment to further result in lower interest expense. Underlying fundamentals for airlines firmly shift to the positive with 1HFY24 EBITDA @ RM1.7b (+83% YoY), with operating fleet at 168 (+22) and passenger load factor of 90% (+3ppts YoY). Mothballed capacity continue to be bring back online as demand recovers, with mgmt. targeting for operating fleet of 195 by end-2024. While Capital A is disposing the aviation business, it will receive AAX shares as consideration with swap price fixed at RM1.30/share. Existing Capital A shareholders will remain highly levered to the underlying enlarged aviation business post-merger of AAGL, AAB and AAX.

 Immediate monetisation of value via dividends in specie of AAX shares – Current mkt. cap for Capital A @ RM4.1b is cheap, relative to the special dividends in specie post-transaction, where Capital A will distribute 1.7b of AAX shares received as part of the restructuring to its investors. At prevailing price for AAX at RM1.99, the total value of dividend in specie would be worth RM3.4b. This would value Capital A remaining business @ only RM0.7b, vs the remaining value of AAX shares held on balance sheet @ RM1.2b. Remaining non-aviation business segments collectively reported a FY23 EBITDA of RM176m and FY23 book equity of RM303m.

 Fund inflow post PN17 exit classification – The gains of disposal of the aviation business and subsequent fair value accounting of the AAX shares are expected to return Capital A’s book equity to positive. Our estimate suggests a proforma book equity of RM225m based on FY23 financial statements and mgmt. estimate of the gains of disposal. If so, Capital A will likely be able to exit its PN17 classification which will attract new fund inflow from institutional investors that previously are unable to invest. With strong tailwinds driving the underlying aviation, benefiting Capital A via its remaining holdings of 615m AAX shares, we believe there will be interest in Capital A.

Valuation

 Our Sums-of-Parts valuation indicate a FV of RM1.52/share for Capital A, reflecting the value of AAX shares to be received at prevailing market price of RM1.99/share. We value the remaining business segment at 10x FY23 EV/EBITDA for most segment, except for Engineering at 15x FY23 EV/EBITDA (on account of more attractive MRO business) and book value for the Others segment. We have taken the conservative approach to the valuation, as we did not reflect: (1) the improving business outlook in FY24 owing to the stronger MYR; and (2) we assume all segment liabilities as financial debts to be deducted against Enterprise Value calculation.