AirAsia Group (AAG) has announced RCUIDS exercise (with free warrants) to raise up to RM1bn in order to address the group’s short-term liquidity issue. While the exercise is somewhat within our expectations, we are still relatively concern of the overall aviation sector outlook. Management has highlighted that the exercise will not fully address the group’s current financial concerns. Reiterate SELL recommendation with unchanged TP: RM0.56 based on 8x PE tagged to FY23 EPS.

NEWSBREAK

AirAsia Group (AAG) has announced a renounceable rights issue of up to RM1bn in nominal value of 7-year redeemable convertible unsecured Islamic debt securities with a nominal value of RM0.75 each (RCUIDS) on the basis of 2 RCUIDS with 1 free detachable warrant for every 6 ordinary shares in AAG (value and entitlement date to be determined on later date). AAG is expected to issue up to 1,365.4m RCUIDS and 682.7m warrants. The indicative profit rate of the RCUIDS is set at 8% per annum. Major shareholders Tony and Kamarudin are committed to their allotment, while AAG intends to procure underwriting arrangement to underwrite 50% of the remaining allotment of the RCUIDS, which will then raise at least RM615.9m to the company (821.2m RCUIDS).

HLIB’s VIEW

A necessary path. The rights issue is somewhat within our expectations, raising up to RM1bn cash to provide enough short-term liquidity to the group. However, the management has also highlighted that the exercise will not fully address the group’s current financial concerns as the RM1bn would not be sufficient to meet its long-term cash flow requirements. Management will continue to explore other available options and/or corporate proposals to be undertaken with the intention to improve the group’s financial performance in the longer term. Furthermore, the RM1bn will not be able to fully cover the current negative shareholder’s equity position of RM1.6bn (as at 1QFY21), which is expected to deteriorate further with the on-going operational losses at least for the next 1 year.

Forecast. Unchanged.

Maintain SELL, TP: RM0.56. We maintain our SELL recommendation on AAG with unchanged TP of RM0.56, based on 8x PE tagged to FY23 EPS. We remain concern on the current negative equity position and the upcoming dilutive rights issue exercise. The overall aviation sector is still heavily affected by the on-going uncertainty on Covid-19 cases giving rise to ongoing strict lockdown measures in place.

Source: Hong Leong Investment Bank Research - 13 Jul 2021