In an announcement to Bursa Malaysia, AirAsia is proposing a rights issue of up to RM1b via 7-year redeemable convertible unsecured Islamic debt securities (RCUIDS) on the basis of 2 RCUIDS with 1 free detachable warrant for every 6 shares in AirAsia. We view this latest exercise positively to enable the group to raise sufficient funding as an interim measure to ride through the current pandemic-related challenges. We maintain our TP of RM0.70 based on 9x FY22E EPS. Maintain UNDERPERFORM.

Rights issue to raise up to RM1b. In an announcement to Bursa Malaysia, AirAsia is proposing a rights issue of up to RM1,024,058,370 in nominal value of 7-year RCUIDS with a nominal value of RM0.75 each on the basis of 2 RCUIDS with 1 free detachable warrant for every 6 ordinary shares in AAGB. We view this latest development positively as an interim measure to address its immediate cash flow requirements during this on-going pandemic. Based on the nominal value of the RCUIDS of RM0.75 each, the proposed rights issue would result in the issuance of up to 1,365,411,160 RCUIDS together with up to 682,705,580 new warrants. For illustrative purposes, the proposed rights issue could raise up to approximately RM1b which is expected to be utilised for fuel hedging settlement (RM227m), aircraft lease & maintenance payments (RM154m), AirAsia Digital (RM123m) and general working capital expenses (RM508m). The proposed rights issue is expected to be completed in 4Q 2021. Based on current share price of RM0.885, the theoretical ex-rights price is RM0.85/share. Upon full conversion of the RCUIDS and warrants, AirAsia’s shares base is expected to be enlarged from 3,898m up to 6,210 (under maximum scenario).

Salient terms of the RCUIDs. The RCUIDS shall be issued at 100% of its nominal value of RM0.75 each and the conversion price of the RCUIDS is also fixed at RM0.75 for every 1 new AAGB Share (which is at a 15% discount to last traded AirAsia share price of RM0.885). Sweetening the RCUIDS for holders is a profit rate of 8% per annum over 7 year. The conversion rate is 1 RCUIDS to 1 AirAsia share, convertible at any time on or after the issue date up to maturity. We think that the RCUIDS is a better investment option for those looking for an exposure to AirAsia given its 8% yield and downside risk protected by a phased redeemable-at-par feature beginning in year 4 while there could be potential upside from capital gains to be reaped from conversion at any time within the 7 years from issuance, provided that the rehabilitation process of AirAsia goes well.

Outlook. We expect AirAsia to face a tough operating environment over the next three to four quarters, still derailed by widespread travel disruptions due to COVID-19. The group had in 1QCY21 completed two tranches of private placement, raising RM336m. The private placement is part of its plans to raise between RM2.0b to RM2.5b in a combination of debt and equity funding to ensure sufficient liquidity for the Group. The group has secured commitments from banks for government guarantee loan under the Danajamin Prihatin Guarantee Scheme and it is in its final stages of terms discussion and completion. In addition, AirAsia has ongoing deliberations with a number of parties for joint-ventures and collaborations that may result in additional third- party investments in specific segments of the group's business.

Reiterate UP. Longer term, AirAsia’s fortune rests on how successfully it can turn around and transform itself into a digital travel and lifestyle company. Faced with negative operating cashflow and negative equity – BVPS projected at -RM0.71, it is urgently resolving its liquidity and capital adequacy issues via cash calls such as this, which we believe is not the last. There will likely be further funding exercises via placements and borrowings/debt rescheduling. Until then, we maintain UP call. TP maintained at RM0.70 based on 9x FY22E EPS.

Upside risks include faster-than-expected economy reopening and a successful US listing of its digital business.

Source: Kenanga Research - 13 Jul 2021