AirAsia Group (AAG) has proposed to dispose Merah Aviation (owns 25 aircrafts and lease back to AAG) for USD768m (RM3.2bn) and enter into sales and lease back agreement for another future 4 aircrafts to be delivered in 2019, with purchase consideration to be determined at a later date. Post completion of the asset disposal exercise by 2Q19, AAG will further strengthen its balance sheet and potentially declare higher dividends. Maintain BUY recommendation with unchanged TP: RM3.65 based on 10% discount to SOP of RM4.05, as AAG benefits from competitors cutting capacities and the recent decline in jet fuel price as well as AAG’s current strong balance sheet position.

NEWSBREAK

AirAsia Group (AAG) has proposed to enter into sales and purchase agreement (SPA) to dispose its aircraft leasing business subsidiary Merah Aviation, (owns 25 aircrafts and lease back to AAG) to Castlelake for USD768m (RM3.2bn). In addition, AAG has also proposed another sales and leaseback agreement (SLB) of another 4 new aircrafts to be delivered in 2019 with Castlelake, of which, the purchase consideration will be determined at a later date, depending on the final date of delivery and pricing of each aircraft. Post completion of the disposal of Merah Aviation, AAG is expected to incur annual lease rental cost of USD83.1m (RM348.0m) for the 25 aircrafts. The duration of the lease is up to 15 years anniversary from the date of manufacture of each aircraft. Relating to SLB exercise, the annual lease rental cost will be USD13.9m (RM58.2m) with duration of 12 years from the date of each aircrafts delivery. Subject to shareholders’ approval, the disposal SPA exercise is expected to complete by 2Q19. AAG is expected to recognise a disposal gain of RM174.9m (excluding SLB). With the proceeds of RM3.2bn, AAG will repay RM1.9bn of existing debt pertaining to the 25 aircrafts and pay RM14.7m estimated expenses for the exercise, while the utilization of remaining RM1.3bn is still being evaluated.

HLIB’s VIEW

Positive. With the proposed exercises, AAG will further strengthen its balance sheet and become an asset light airline group. AAG was already in net cash position of RM1.1bn based on recently reported 3Q18 result and the group had announced a special dividend payout of 40sen/share (RM1.3bn). We expect continued strong dividend payout by AAG in coming years, following the strong earnings of MAA (Malaysia) operation and continued asset monetization exercises.

Forecast. Unchanged.

Maintain BUY, TP: RM3.65. We maintain our BUY recommendation on AAG with TP of RM3.65, based on 10% discount to SOP of RM4.05. We maintain positive outlook on AAG, given: (i) declining jet fuel price; (ii) potentially higher yield in view of competitors cutting capacities; and (iii) strong balance sheet position with net cash of RM1.1bn as at end Sep 2018 and upcoming aircrafts disposal exercise.

Source: Hong Leong Investment Bank Research - 26 Dec 2018