Highlights/ Comments

• AirAsia has proposed to dispose its aircraft leasing operations (under AAC) to 3 entities managed by BBAM (namely Herondell, Incline B and FLY Leasing) for a total consideration of US$1,185m (RM4.6bn), inclusive of cash US$1,085m (RM4.2bn), fund investment in Incline B of US$50m (RM195m) and FLY’s share of US$50m (RM195m). The enterprise value (EV) of AAC operation is US$2,846.2m (RM11.1bn).

• The proposal includes existing 80 aircrafts, up-coming 4 new aircrafts and existing 14 aircraft engines.

• Based on the EV valuation, AAC is valued at P/E of c.17x for FY17 (estimated US$70m profit contribution to AirAsia), substantially higher than AirAsia P/E of only 8.0x.

• AirAsia is expected to recognize gain of disposal of RM967.1m (before accounted for the up-coming 4 aircrafts). The disposal exercise is expected to be completed by 3Q17.

• Post exercise, AirAsia may become a net cash airline company, given the net cash proceed of RM4.1bn and transfer of debts RM6.7bn to BBAM related companies. As at end FY17, AirAsia has a net debt of RM7.5bn.

• The impact to P&L include loss of lease income from associates to AAB and higher lease expenses of RM404.3m (AAB portion), which will be offset by savings of RM110.2m finance costs and RM206.2m depreciations for AAB.

• The cash proceed will be used to: 1) repay bank borrowings of RM788.1m; 2) estimated expenses of RM112m; and 3) utilization of the remaining sum of RM3.3bn will be determined on a later date (a portion of the sum will be distributed as special dividends).

• There are also additional agreements for future aircraft, where AirAsia will enter into sales and leaseback (SLB) with Incline B and FLY Leasing for additional 48 aircrafts and options for another 50 aircrafts that will be delivered in between 2019 to 2025. The value of the transactions (disposal consideration) will be determined on a later date.

• Post the monetization exercises and IPO of IAA and PPA, AirAsia will focus more into new ventures and JVs in India and Japan as well as potential 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 2018 will further enhance AirAsia’s valuation.

Valuation

• Uphold BUY recommendation with higher TP of RM5.16 (from RM5.00) based on SOP. AirAsia shareholders stand to receive final dividend of 12 sen (in addition to interim 12 sen) and special dividend of up to RM1.00 (from AAC disposal), translating into potential dividend yield of 27.0%.

Source: Hong Leong Investment Bank Research - 2 Mar 2018