AIRASIA is selling its remaining 25% stake in AAE to Expedia SEA for USD60.0m or RM240.0m. Positive on the disposal as it is in line with group’s direction to focus on core business and will lighten the balance sheet. Maintain FY18-19E CNP, but raised FY18E NP by 12% post disposal. Reiterate OUTPERFORM with an unchanged SoP-driven Target Price of RM4.80.

AAE Travel Pte Ltd disposed. Yesterday, AIRASIA announced the disposal of its remaining 25% in AAE Travel Pte Ltd (AAE) to Expedia Southeast Asia Pte Ltd (Expedia SEA) for a total consideration of USD60.0m or RM240.0m based on an exchange rate of USD1.00 to RM4.00. The transaction is expected to book in gains of disposal of c.RM181.6m, to be concluded by 3Q18.

Positive on disposal. We are positive on the disposal; (i) as it is in line with AIRASIA’s strategic direction to focus on their core airline business by growing its AOCs, and (ii) result in lighter balance sheet with net gearing reduced from 0.90x (as of 1Q18) to 0.87x. Nonetheless, we do not expect any special dividends from this particular disposal as we believe that it would be used for working capital.

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 sale of Santan and Red Cargo.

Earnings estimates. Post disposal of AAE, we raised our FY18E NP by 12% after factoring the gain from the disposal. However, we made no changes to our FY18-19E CNP as we deem the disposal gain to be non-core earnings.

Reiterate OP but with SoP-derived TP of RM4.80 pegged to 9.0x FY18E PER (4-year average) on its core earnings, coupled with RM0.78/share special dividend. We deem our 9.0x FY18E PER on their core business (pegged at 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 on the back of weak competition from other domestic airlines, and (iii) strong growth potential on the back of an expanding capacity. We foresee immediate- term catalyst from the finalization of special dividends (anticipating RM0.78) from the recent sale of AAC back in March.

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

Source: Kenanga Research - 15 Aug 2018