Highlights/ Comments

• AirAsia proposed to place additional 20% new shares (559m new shares) to major shareholders Tan Sri Dr. Tony Fernandes and Datuk Kamaruddin (through their jointly owned investment company Tune Live) at current market price of RM1.84/share (to be lowered to RM1.80/share, subject to the approval of final dividend of 4sen/share).

• The exercise will raise RM1bn cash to AirAsia, which will be used to pare down debts, capex for aircrafts and new corporate headquarter in KLIA2 and working capital.

• Subject to the approval of minority shareholders and Bank Negara Malaysia (if the fund for the placement by Tune Live is sourced from offshore), the exercise is expected to complete by 3Q16.

• The exercise came in as a surprise for us, given AirAsia’s strong cash position of RM2.4bn (including RM0.7bn restricted cash) as at Dec-15 and the expectation of additional more than RM1bn cash profits from operat ion in FY16, vs. its short-term debt position of RM2.4bn as at Dec- 15 (assuming no re-financing). Furthermore, the expected EPS dilution is relatively high at 16.7% from the exercise.

• Nevertheless, the exercise showed the confidence and long term commitment of major shareholders Tan Sri Dr. Tony and Datuk Kamaruddin on the prospect of AirAsia operation.

• The cash proceeds of RM1bn would be able to save RM10.6m interest expenses for AirAsia as well as improve its net gearing position to 2.1x from 2.3x (as at Dec-15).

• AirAsia is expected to take delivery of 9 A320s (5 CEOs & 4 NEOs), with capex of circa RM1.5bn (usually backed by 70- 90% long-term financed).

Risks

• World crisis (ie. war, terrorism and epidemic outbreak), delay in KLIA2 completion, prolong surge in jet fuel and high speed train infrastructure between Singapore and P. Pinang.

Forecasts

• Unchanged, pending completion of the placement exercise.

Rating

BUY

Positives

• 1) Beneficiary of strong air traffic into Malaysia, in line with government initiatives to boost tourism sectors; 2) Largest and lowest cost LCC in Asia with strong brand name; 3) Low jet fuel price; and 4) Strong ancillary income.

Negatives

• 1) Strengthened US$; and 2) Continued losses from associates IAA and PAA.

Valuation

• We remain positive on AirAsia’s outlook given the improvement in tourist arrivals, expectation on yield sustainability, low jet fuel costs and RM appreciation. Maintained Buy with unchanged TP of RM2.14 based on unchanged 10% discount to SOP.

Source: Hong Leong Investment Bank Research - 4 Apr 2016