AIRASIA will be disposing 25 existing aircrafts for USD768.0m and 4 new aircrafts at a price that is yet to be finalised to Castlelake. We are positive on its de-gearing move. Raised FY19E NP by 14%, but kept FY18-19E CNP unchanged. Reiterate OUTPERFORM with unchanged Target Price of RM3.25.

News. On Monday, AIRASIA announced that they would be disposing 25 aircrafts to Castlelake for USD768.0m or RM3.2b and 4 additional new aircrafts slated for delivery in 2019 for a price that have yet to be finalised (excluded from the sale consideration of USD768.0m). To recap, this is not AIRASIA’s first deal in selling off its aircraft assets as they previously sold 84 aircrafts to BBAM for USD1.18b.

Second sale. We are optimistic on management’s continuous de- gearing effort, as these sales of aircraft would further strengthen its already decent balance sheet, which is in a net cash position since 3Q18 after they concluded the sale of aircrafts to BBAM. AIRASIA would be registering one-off net gain of RM174.9m from this particular transaction, and we do not rule out another round of special dividend. To recap, management decided to reward its shareholders with 40.0 sen special dividend from the BBAM deal proceeds. Assuming 30% pay-out from its remaining proceeds from Castlelake deal after settling its debts and expenses, we would expect special dividend of 10.0 – 12.0 sen should management be feeling generous in rewarding its shareholders again.

Outlook. Going forward, management are still pursuing their expansion plan to grow their market share while its competitors are scaling back capacity and remains hopeful that they are able to turnaround its Philippines and Indonesia operations by 2019. As for fuel hedging, management hedged Brent at the following; 1Q19: 48% at USD67.24bbl, 2Q19: 27% at USD65.40bbl. On its digital transformation front, they are actively engaging with their partners i.e. Google, Airbus (Skywise) & Palantir to integrate machine learning to their Big data platform to improve airline operations which would lead to cost savings in the future, and we believe that AIRASIA could be using a major part of the proceeds from Castlelake deal to scale its digital business which might transform them into the next “Unicorn” rivalling names like GRAB and Go-Jek in South East Asia which are all asset light.

Earnings estimates. We tweaked our FY19E NP higher by 14% after factoring in the disposal, but kept our FY18-19E CNP unchanged.

Reiterate OP but with unchanged TP of RM3.25, pegged to 9.0x FY19E PER (4-year average) on its core earnings. We deem our 9.0x FY19E 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, (iii) strong growth potential on the back of an expanding capacity and iv) lower fuel cost environment. This time around we did not include the potential special dividend into our TP as we have not get any indication from management.

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

Source: Kenanga Research - 26 Dec 2018