AIRASIA announced the sale of AAC worth USD1.185b (RM4.6b) to entities managed by BBAM. Positive on the disposal for; (i) it is in line with group’s direction to focus on core business, (ii) lightened balance sheet, and (iii) potential special dividends of RM0.78. Tweak FY18-19E CNP down by 15%/14% post disposal. Our new TP of RM5.30 (from RM5.25) is based on (i) 10x FY18E PER and (ii) cash portion special dividend of RM0.78. Reiterate OP.

AAC finally disposed. Yesterday, AIRASIA announced the 100% disposal of their aircraft leasing arm AAC to entities managed by BBAM- (i) NBB, (ii) Incline, and (iii) FLY for a disposal consideration of USD1.185b (RM4.6b) comprising (i) cash consideration of USD1.085b and (ii) other investments/equity of USD0.1b. The sale includes 84 aircrafts (4 future deliveries) and 14 aircraft engines. Initial cash disposal proceeds of RM3.5b would be used to: (i) pare down debts (RM788.1m), (ii) defray disposal expenses (RM112m), and (iii) the remainder of RM2.6b potentially up for special dividends. The transaction is expected to book in gains of disposal of c.RM967m to be concluded by 3Q18.

Positive on disposal. We are positive on the disposal for; (i) it is in line with AIRASIA’s strategic direction to focus on their core airline business, (ii) lightened balance sheet whereby net gearing to reduce from 1.16x (as of 4Q17) to 0.23x, and (iii) potential dividends of up to RM0.78 based on 100% pay-out on RM2.6b initial cash proceeds. We believe it is highly likely for AIRASIA to dish out the entire RM2.6b portion as special dividends which we have imputed given their net gearing levels post disposal are much lower vis-à-vis net gearing levels of 1.0x-4.0x in the past. That said, we note that earnings moving forward would be reduced from the absence of their leasing income.

Outlook. Moving forward, AIRASIA strives for One AirAsia whereby they intend to consolidate and own 100% effective stakes in Thai (current effective interest 45%), Philippines (current effective interest 19.6%), and Indonesia (current effective interest 49%) operations through share swaps. They are also targeting to list Philippines AOC by 2019. For FY18, AIRASIA plans to place higher focus on their domestic routes by transferring out their longer haul 4-hour flights (KUL- Changsa, KUL-Kaohsiang) to AAX for shorter haul domestic flights, which have shorter turnaround time and hence improving profitability from higher plane utilisation. We expect further improvement in utilisation post restructuring of routes. In terms of further asset divestment, we are looking forward to potential sales of Expedia, Santan and Red Cargo.

Earnings estimates. We adjust our FY18-19E CNP down by 15-14% after accounting for: (i) absence of leasing income and (ii) higher leasing expenses. Note that we have excluded the gains in disposal worth RM967m from our CNP given its one-off nature.

Maintain OP with higher TP of RM5.30 (from RM5.25). Our TP is based on (i) an unchanged 10x FY18E PER at +0.5SD (4-year average) and (ii) included cash portion of RM0.78 from special dividends. We deem our 10x FY18E PER pegged at +0.5SD on 4-year average fair given (i) AIRASIA’s much healthier net gearing post AAC disposal coupled with further asset monetization plans from Santan/Red Cargo/Expedia to honor their intention for special dividends every two years, (ii) the increased focus on higher turnaround domestic routes, and (iii) strong growth potential on the back of an expanding capacity without overly sacrificing yields owing to their dynamic pricing model.

Risks include lower-than-expected load factors and higher-than- expected fuel costs, higher-than-expected operating costs.

Source: Kenanga Research - 02 Mar 2018