AIRASIA announced that they are disposing their entire 50% stake in Asian Aviation Centre of Excellence (AACE) for USD100.0m (RM429.3m) to CAE with the sale expected to conclude by Nov 2017. Positive on the disposal given that AIRASIA can now fully focus on its core business while there is also the potential of a special dividend of up to 12.0 sen per share. Maintain FY17E CNP but lower FY18E CNP by 1%. Maintain OP with lower TP of RM4.05.

News. Last Friday, AIRASIA announced that they are disposing their entire 50% stake in their JV Co - Asian Aviation Centre of Excellence (AACE) for USD100.0m (RM429.3m) to CAE which currently owns the remainder 50% stake in AACE. The sale price of USD100m is at 18.0x PER based on AACE’s FY16 audited accounts. AIRASIA would be recognizing a one-off gain amounting to RM187.6m upon disposal. The transaction is expected to take place by end Nov 2017 (4Q17).

Positive on disposal. Positive on the disposal as it (i) allows AIRASIA to focus on their core airline business, (ii) the loss of AACE’s contributions has minimal impact in AIRASIA’s earnings moving forward – only c.RM22.0m of profits/annum that accounts for only 1% of our FY18E CNP, and (iii) above all, there is a huge potential for special dividend of up to 12.0 sen/share (assuming 100% pay-out of total proceeds of USD100m) arising from the disposal given that (a) AIRASIA’s net gearing level of 1.27x (as of 1Q17) is at a comfortable level and relatively healthier compared to FY14-15 when it was at 2.3x- 2.5x, (b) majority stakeholders (TS Tony Fernandes and Datuk Kamarudin) who owns c.33% stake have incentives for dividends to be dished back to them in order to recoup the RM1.0b placements financing which they injected in FY16 for the additional 20% stake (refer to report dated 18/4/16), and (c) management had reiterated their intention to pay out a special dividend every 2 years. That said, we note that AIRASIA had only dished out 50% DPR or RM500m worth of special dividend back in FY13 when they recognized RM1.0b worth of fair value gains on the listing of Asia Aviation Pcl (major shareholder of Thai AirAsia). Based on a more conservative 50% DPR, the sale of AACE would translate to special dividend of 6.0 sen/share. Nonetheless, should AIRASIA choose to keep the proceeds, the sale of AACE would bring AIRASIA’s net gearing down lower by 8% to 1.16x (from 1.27x as of 1Q17).

Outlook. Currently, AIRASIA is pushing for all their remaining associates namely Thai, India and Japan to be consolidated by recognizing them as a subsidiary within their accounts. They are targeting Thai to be consolidated by 2Q17 while the remaining 2 by the year end. Meanwhile, we note that AIRASIA has currently hedged 75% of their fuel at USD59/bbl. In regard to the disposal of AAC, AIRASIA has narrowed their bids to 2 final bidders and are underway to finalize the agreement which we believe will be concluded by year end.

Minimal impact to FY18E CNP. The sale would allow the group to recognize a gain in disposal amounting to RM187.6m boosting FY17E NP by 13%. However, these one-off gains will only be reflected in our FY17E reported earnings. Hence, we maintain our FY17E CNP of RM1417.0m but reduce our FY18E CNP marginally by 1% to RM1501.0m on the loss of income from AACE.

Maintain OUTPERFORM. Post adjustment in earnings, we reduce our TP marginally to RM4.05 (from RM4.10) while reiterating our OUTPERFORM call on unchanged PER of 9.0x based on 5 year avg. We continue to like the stock for: (i) its growth potential, (ii) competitive advantage in the aviation industry from its low operating costs, (iii) special dividend from the sale of AAC, and (iv) further cost optimisation plans.

Source: Kenanga Research - 28 Aug 2017