We see trading opportunity in AirAsia on the listing debut of its Thai associate via holding company Asia Aviation given the valuation gap arising from the IPO shares' forward PE multiple of 14.1x FY12 earnings vs AirAsia's 9x. Furthermore, we view the listing as positive as it will recapitalize Thai AirAsia and allow AirAsia to de-gear when former can raise its own aircraft financing. This will allow AirAsia focus on its growth plans for its other associates. We maintain our earnings and BUY call, with our FV retained at RM4.57, based on 12x FY12 earnings.
Briefly on Asia Aviation's listing. Asia Aviation is a holding company that owns 51% of Thai AirAsia, with the remaining 49% held by AirAsia Bhd. It has no other business entities. The listing sought by Asia Aviation, at an IPO price of THB3.7 per share, involves an offer of 1.212bn shares (750m new shares and 462.5m shares from existing shareholders) to the public. This will allow the company to meet the minimum listing public float requirement of 25% of its paid up capital. The listing will raise THB4.5bn (RM450m), of which we reckon the 750m new shares amounting to THB2.775bn (RM277.5m) will be used to recapitalize Thai AirAsia via a subscription of a rights issue for 3.55m new shares in the Thai low-cost carrier. This will raise Asia Aviation's stake in Thai AirAsia from 51% to 55%, diluting AirAsia's stake to 45% from 49%.
How AirAsia can de-gear. Thai AirAsia aims to double its Airbus A320 fleet to 48 aircraft by 2016. It is understood that Thai AirAsia is allocating about THB1.5bn (RM150m) for aircraft acquisitions in the immediate term. The remaining THB2.775bn (RM277.5m) will be used for working capital and to pay off liabilities owed to AirAsia, which as at 1QFY12 stood at THB45m (RM4.5m). We see the progressive transfer of aircraft currently leased by Thai AirAsia from AirAsia. This bodes well for AirAsia as this will help it free up some debt which it raised to buy Thai AirAsia's fleet. AirAsia earned a lease income of about RM250-RM300m annually on this fleet of 24 aircrafts. With AirAsia's outstanding debt totaling RM7.5bn as of 1Q and noting that 27% (24 aircraft) of AirAsia's fleet is currently leased by Thai AirAsia, this could potentially free up as much as RM2.02bn of AirAsia's debt should the group directly transfers them to Thai AirAsia. This will consequently reduce AirAsia's net gearing to 79% from 126%, cut interest expenses by RM90m-RM100m from RM380m-RM400m per annum and about RM154m in depreciation charges. Thai AirAsia is sitting on a cash pile of THB2.62bn (RM262m), with long term liabilities of THB101.3m (RM10.1m) and THB363.8m (RM36.3m) on amounts owing to related parties. An outright transfer of debt from AirAsia to Thai AirAsia's books would bump up the latter's net gearing to 6.16x based on 1QFY12 numbers given its small equity base of about THB2.8bn post IPO listing and recapitalization. But with Thai AirAsia expecting earnings of THB2.315bn (1QFY12 already at THB621m), its net gearing would ultimately reduce to 3.4x by end-FY12.