Highlights/ Comments

• AirAsia has announced that it has entered into Share Purchase Agreement with CAE International to dispose its entire 50% stake in JV co - AACOE (Training Academy) for a total consideration of US$100m (RM430m). The cash proceed will be utilized for working capital purpose.

• Based on the disposal price, AACOE is valued at P/E of 17.2x for FY17 (assumed RM25m profit contribution to AirAsia), substantially higher than AirAsia P/E of only 7.0x.

• AirAsia is expected to recognize gain of disposal of RM187.6m from the exercise. The disposal exercise is expected to complete by 4Q17.

• We are overall positive on the announcement as AirAsia continued to monetize its undervalued assets/businesses and improve its cash flow and net gearing (one of the concerns of investors).

• Furthermore, we are positively surprised by the high disposal price of RM430m as compared to our assumed price of RM250m.

• Going forward, management has guided further monetization exercises in the pipeline, including AAC (US$1.0-1.2bn/RM4.4-5.3bn) and Expedia (US$86m/ RM378.4m), as AirAsia group continues to focus on its core business of air travel services.

• Assuming the completion of the mentioned monetization exercises, AirAsia will receive circa RM5.5bn or RM1.65/share, while reducing its capital commitment (towards JV/Associates).

• We believe there is a high possibility of special dividend payout post completion of the monetization exercises (targeted by end FY17). Based on a conservative 50% payout ratio, shareholders stand to benefit 82sen/share (on top of normal dividend payout policy of 20% of net profit), translating into dividend yield of 24.6% in FY18.

• The guided IPO exercise of PAA and IAA by end FY17 or FY18, will further improve AirAsia’s cash flow, as both entities will be able to enter their own financing for expansion purpose.

• Thereafter, AirAsia will focus more into JVs in India and Japan as well as Vietnam and China market, moving nearer to its goal of creating an “Asia Airline”.

Risks

• World crisis (i.e. war, terrorism and epidemic outbreak), shutdown of KLIA2, surge in jet fuel price and high speed train infrastructure between Singapore and Penang.

Forecasts

• Maintain.

Rating

BUY ↔

• Despite the concern of RM depreciation, AirAsia is expected to remain on growth trajectory from the strong capacity expansion, high load factors and low jet fuel costs. Asset monetization and JV/Associates IPO exercises in 2017 will further enhance AirAsia’s valuation.

Valuation

• Uphold BUY recommendation with unchanged TP of RM3.82 based on SOP. We have not accounted for the valuation from monetization of assets, which will increase our valuation to RM4.15.

Source: Hong Leong Investment Bank Research - 28 Aug 2017