AIRASIA has formed a 50:50 JV Co with SATS called GTRH by divesting 49% of GTR Malaysia through 50% of GTRH for: (i) RM372.2m of cash, and (ii) effective 40% stake in SGS Singapore. AIRASIA will book in gains of divestment of RM365.7m. Positive on the development on: (i) potential dividends of up to 11.0 sen/share, (ii) synergistic cost benefits from new JV Co, and (iii) new JV Co to target third party airlines for business expansion. Maintain FY17E CNP but lower FY18E CNP by 2%. Post earnings adjustment, maintain OP with a lower TP of RM3.95 (from RM4.05) on unchanged 9.0x Fwd PER.

New ground handling JV Co. AIRASIA announced a series of corporate exercises whereby post exercises; AIRASIA would form a 50:50 JV Co named Ground Team Red Holdings (GTRH) with SATS Ltd (SATS – listed in SGX). This will be done by AIRASIA divesting 49% stake of GTR Malaysia (currently the 100%-owned subsidy of AIRASIA) through 50% stake sale of GTRH to SATS in exchange for (i) RM372.2m of cash and (ii) 40% effective equity in SGS Singapore (currently 100% subsi. of SATS). AIRASIA will book in gain on disposal of RM365.7m for the transactions. These transactions are expected to be completed by Nov-2017 (refer back for detailed breakdown).

Positive on news. Not surprised on the news given that it is aligned with management’s interest to divest non-core assets. That said, we are positive on the new developments given that (i) JV with SATS will create a synergy that would enhance the ground handling business in terms of cost and efficiency, (ii) GTRH (JV Co) would start to penetrate the ground handling business for third party airlines – contributing to the expansion of AIRASIA (GTR Malaysia previously was solely providing ground handling services to AIRASIA in Malaysia), and (iii) we potentially see a round of special dividends of up to 11.0 sen/share (assuming 100% pay-out on gains of RM365.7m). Our 100% dividend payout assumption is in line with management’s promise to pay out proceeds of business disposal and we note that AIRASIA had previously paid out 100% dividends on their 50% stake sale of AACE worth RM429.3m back in August 2017. Post exercise, AIRASIA’s net gearing is expected to fall by 5% from 1.34x to 1.28x (as of 2Q17).

Outlook. AIRASIA is striving towards creating One AirAsia by consolidating and owning 100% effective stakes in Thai (current effective interest 45%), Philippines (current effective interest 19.6%), and Indonesia (current effective interest 49%) operations. While we believe the goal is achievable through issuance of new shares at AIRASIA group level and subsequently swapping it with other existing shareholders of associates, we opine that it might not materialize in the near term given that there are still various regulation hurdles in respective countries to overcome. AIRASIA is targeting to list Philippines AOC by 2Q18. For the remainder of FY17, AIRASIA has currently hedged 75% of their fuel at USD59/bbl.

Lowered FY18E earnings. Post exercises, we increase our FY17E earnings by 23% to RM1.91b after imputing the gain of disposal to be recognized. That said, we maintain our FY17E CNP of RM1.4b as we treat this gain as a one-off item. Meanwhile, we reduce our FY18E CNP by 2% to RM1.47b after accounting for the additional ground handling cost AIRASIA would incur for their Malaysian operations after divesting 49% stake in GTR Malaysia.

Valuations. Post adjustment to earnings, we reiterate our OP call with a lower TP of RM3.95 (from RM4.05) based on unchanged FY18E PER of 9.0x (5-year average). We continue to like AIRASIA for their growth potential, competitive advantage within the aviation space from its low operational costs and potential special dividends of AAC.

Source: Kenanga Research - 31 Oct 2017