CAPITALA has proposed the listing of a unit, which is the licensee of the AirAsia brand on NASDAQ at USD1.15b (RM5.4b) valuation. The exercise will monetise its intangible asset, i.e. the AirAsia brand, to facilitate CAPITALA’s regularisation plan. We maintain our forecasts and MARKET PERFORM call but separately, reduce our TP by 7% to RM0.78 (from 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 special purpose acquisition company (SPAC) listed on NASDAQ for the proposed business combination between GMFI and Capital A International (CAPI). CAPI will be the manager and licensor of the AirAsia brands and will merge with GMFI to list on the US exchange, based on an estimated value of USD1.15b (RM5.4b) via a combination of shares and debt novation. The AirAsia brands are currently parked under CAPITALA’s 100%-owned Brand AA Sdn Bhd, which will be transferred to 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. The deal is expected to be completed by 1Q CY25.

The exercise will monetise its intangible asset, i.e. the AirAsia brand, to facilitate CAPITALA’s regularisation plan to lift it out of the PN17 status. However, it will not materially alter its fundamentals. The AirAsia Brand was valued at between USD1.01b to USD1.3b based on an independent valuation conducted by Brand Finance plc, an independent brand valuation consultancy.

Specifically, the deal entails CAPI to merge with GMFI and takes over the latter’s listing status, CAPITALA will receive 94% of the enlarged share capital in the merged entity or CAPI at a value of USD1b. Of the 94%, CAPITALA plans to distribute a 47.9% stake in the merged entity to shareholders. After the proposal, CAPITALA and CAPITALA shareholders will hold 46.1% and 47.9% stake in CAPI, respectively. The remaining 6% will be held by existing Aetherium shareholders. Brand AA will take on a USD150m term loan currently held by CAPITALA’s unit, Asia Aviation Capital Ltd (Labuan).

Brand AA Sdn Bhd is the entity 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. The royalty fee rate amounted to 1% of revenue from AirAsia’s four airlines in Malaysia, Thailand, Indonesia and the Philippines. Similarly, for AirAsia X and Thai AirAsia X, the fee is 0.5% and 1.5%, respectively.

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.

For illustration purposes, CAPITALA’s total negative shareholders equity as at 30 Sept 2023 is expected to be reduced from RM10.5b to RM6b (following the proposed Brand AA disposal for the transfer of the AirAsia Brand of RM4.5b will no longer be subject to intercompany adjustments). Note that the proposal is not expected to result in a pro forma gain or loss to the Group. Following completion of the proposal, CAPITALA will cease to consolidate the results of Brand AA. Consequently, there could be potential earnings leakages or losses to the group from revenue and profit contribution.

Forecasts. Maintained pending the completion of the listing.

Valuations. However, we fine-tuned our airlines PER from 10x to 9x in tandem with peers average. Correspondingly, our SoP-TP is reduced from RM0.84 to RM0.78. We maintain our MARKET PERFORM call pending more details of the deal. 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 CY24, we project CAPITALA’s system-wide revenue seat km (RPK) to grow 20% to an estimated 70b in CY24, after recovering by an estimated 24b to 58b in FY23 based on our forecasts. The group reiterated that the passenger throughput recovery is gaining traction. It is targeting to reactivate 187 aircrafts with 161 aircrafts available for operation, and its operating capacity to reach 74% of pre-COVID level, leveraging on the high travel season and the newly established visa-free travel between China and Malaysia starting 1 Dec 2023. 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 2024 as it adds new international lanes and delivery hubs. BigPay has also launched its digital lending platform to provide new loan products.

Investment case. 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 - 29 Feb 2024