CAPITALA has proposed the listing of a unit, which is the licensee of the AirAsia brand, via a special purpose acquisition company (SPAC), on NASDAQ at a USD1b (RM4.77b) valuation. Regardless of whether CAPITALA is able to pull this off, we upgrade our call to MARKET PERFORM from UNDERPERFORM after the recent weakness in its share price. We maintain our earnings forecasts and TP of RM0.84.

Listing unit on Nasdaq via a SPAC deal. The group has entered into a letter of intent with Atherium Acquisition Corp (GMFI), a SPAC listed on NASDAQ for the proposed business combination between GMFI and Capital A International (CAPI). The proposal entails the acquisition of the entire 100% stake in CAPI by GMFI that will result in CAPI becoming a new publicly listed company on NASDAQ. Both parties intend to complete the negotiation three months from the letter of execution of intent. We are positive on this latest corporate development by CAPITAL which will form part of the proposed regularisation plan to lift it out of the PN17 status.

Specifically, the group will setup a new company called CAPI which in turn will acquire 100% stake in Brand AA Sdn Bhd, the entity that has the rights to collect royalty fees from AirAsia Aviation Group Limited (AAAGL), the exclusive licensee of the AirAsia Brand for AAAGL’s aviation related business and its leasing business (primarily responsible for the procurement and delivery of the requisite aircraft for the aviation group). CAPI will be a new investment and strategic development company that leverages the “AirAsia” brand and capitalises on core capabilities in aviation, travel and hospitality and digital technologies, becoming a standalone publicly traded company in the U.S. With 100% equity interest in AirAsia Brand and Leasing. CAPI intends to generate revenue from brand royalty and the leasing of aircraft. Additionally, it will be involved in tactical acquisition, incubation and partnerships to provide platforms for entrepreneurs.

The proposed business combination will be at an indicative equity value of USD1b (RM4.77b) based on an independent valuation of the AirAsia Brand. The group is expected to register a gain arising from this corporate exercise. For illustration purposes, assuming RM1b gain from this corporate exercise, our SoP-TP is expected to be raised by 27% from RM0.84/share to RM1.07/share. The consideration is expected to be via issuance of shares in GMFI and shall be determined and mutually agreed prior to signing of the final agreement. Consequently, there are potential earnings leakages or losses to the group from revenue and potential profit contribution from the royalty income from the use of the AirAsia Brand.

We maintain our forecasts pending more details upon the signing of a definitive agreement. However, we upgrade our call from UNDERPERFORM to MARKET PERFORM but maintain our TP of RM0.84 (see below) as its valuation is now fair after the retracement in its share price. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Outlook. Looking farther into CY23, we project CAPITALA’s system-wide revenue seat km (RPK) to grow 79% to 43b in FY23, after recovering by 20b to 24b in FY22. CAPITALA expects its passenger demand to continue to rise in 2023, judging from the encouraging load factors recorded at 159 international routes. The group has reactivated 157 aircrafts in 1QCY23 with plans in place to reallocate aircraft to operating countries that has stronger demand. By end of 2023, the group is targeting to have all its 215 aircrafts deployed to cater for the rising demand. Its digital segment is expected to remain loss-making. airasia Super App is expected to grow, underpinned by the continued resurgence of travel demand from borders reopening and tactical campaigns, alongside expected growth from airasia Food, Ride and Xpress. Additionally, Teleport is expected to continue expanding throughout 2023 as it adds new international lanes and delivery hubs. BigPay has also launched its digital lending platform to provide new loan products.

We continue to like CAPITALA for: (i) it being a beneficiary of the recovery in air travel post pandemic, (ii) its growing digital business, leveraging on its strong AirAsia brand and AirAsia’s existing client base, and (iii) its dynamic and visionary leadership that should help steer it out of the current financial difficulty. However, we are mindful of it still being under the PN17 status.

Risks to our recommendation include: (i) the recovery in air travel stalls amidst a global recession, (ii) sustained high jet fuel prices, rendering air travel, especially low-cost air travel unaffordable, (iii) CAPITALA’s inability to lift itself out of the PN17 status, and (iv) persistent cash burn at its digital assets.

Source: Kenanga Research - 2 Nov 2023