CAPITALA is selling its airline business to AAX (Not Rated) for RM6.8b, to be satisfied by 2.3b new AAX shares @ RM1.30 and settlement of RM3.8b debt, which should lift it out of the Practice Note 17 (PN17) status. Pending the completion of the deal, we maintain our forecasts, TP of RM0.78 and MARKET PERFORM call. The deal could lift our TP for CAPITALA by 3% to RM0.80.

Selling aviation business to AirAsia X Berhad. The group has entered into share sale and purchase agreement with AirAsia Group Sdn Bhd (AAG) (following AirAsia X Berhad (AAX) internal reorganisation, AAG will assume the listing status of AAX prior to the completion of the proposed disposals) to divest AirAsia Berhad (AAB) and AirAsia Aviation Group Limited (AAAGL) for a total disposal consideration of RM6.8b. AAAGL owns Thai AirAsia, Philippines AirAsia, Indonesia AirAsia and AirAsia Cambodia while AAB operates AirAsia Malaysia, The proposed divestment is expected to be completed by 3Q 2024.

The divestment entails: (i) selling AAAGL for RM3b via issuance of 2.307b new AAG shares at an issue price of RM1.30/share, and (ii) selling AAB for RM3.8b via a debt settlement i.e. AAG assumption of CAPITALA’s debt due to AAB. The group will undertake a pre- completion intercompany debt adjustment in which it will assume AAAGL’s debt to AAB and subsequently AAAGL debt shall be entirely set off against cash dividend to be declared by AAB to the group. Based on the issue price of RM1.30, the group is expected to retain approximately 673m AAG shares or 18% of the enlarged issued shares of AAG post completion of the disposals (assuming RM1b private placement by AAG).

Subsequently, it also proposed a distribution-in-specie via a reduction and repayment of CAPITALA’s share CAPITALA and distributes the new ordinary shares in AAG of approximately RM2.2b in value to the shareholders of CAPITALA of which ratio has yet to be determined. For illustration purposes, based on the issue price of RM1.30, and distribution of RM2.2b implying approximately 1,692.3m new AAG shares (assuming CAPITALA’s outstanding shares of 4,254m). Based on CAPITALA 4,254m shares, the distribution shares are expected to be distributed on the basis of 397 new AAG shares for every 1000 CAPITALA’s shares.

We are positive on this latest corporate development by CAPITALA which will form part of the proposed regularisation plan to lift it out of the PN17 status. The expected gain from divestment of AAGL and AAB are RM4.7b and RM6.1b, respectively. For illustration purposes, the aggregate total gain of RM10.8b is able to offset its negative shareholder equity of RM10.5b as at 31 Dec 2023 and bring it out of PN17.

Based on an independent valuation conducted by Deloitte Corporate Advisory Services Sdn Bhd, AAB and AAGL were valued at RM27b- RM3.5b, and RM3.5b-RM4.4b, respectively. Note that the valuation methodology adopted was based on 5-year discounted projected cash flow for FY24-FY28. Based on the disposal consideration of RM6.8b, the PER works out to 27x our FY24F CAPITALA’s airlines business net profit and 17x consensus FY24 net profit which is premium compared to peers averaging between 9x to 23x. Low-cost carrier peers are trading at consensus 1-year forward PER of between 9x to 23x including Ryanair Holdings Plc (15x), Spring Airline (23x), Easyjet Plc (8x), Air Arabia (9x), and Wizz Air Holdings Plc (9x).

Based on our estimates, CAPITALA’S SoP-TP will increase by 3% to RM0.80 (from RM0.78) (see Exhibit 2). We currently value its airlines business at RM2,250m based on 9x FY24 PER. Post the exercise, CAPITALA will no longer own its airline business directly but via 2,307m shares in AAX. We value AAX post the acquisition of CAPITALA’s airline business at RM2,791m (the sum of its market capitalisation of RM541m before the announcement of the deal and our valuation for CAPITALA’s airline business of RM2,250m), translating to RM1.013/share based on the enlarged AXX share based of 2,754m.

We maintain our forecasts, TP of RM0.78 and MARKET PERFORM call pending approval of its regularisation plan to lift it out of the PN17 status. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Valuations. We also keep our SoP-TP of RM0.78. 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 to 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 pending the above-mentioned proposals. Reiterate MARKET PERFORM.

Risks to our recommendation include: (i) the recovery in air travel stalls amidst a global recession, (ii) sustained high jet fuel Eprxicheibsi,t r1e n–d Ceorinrpgo arairt etr aSvterul,c etusrpee cPiarell ya nlodw P-coosstt 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 - 26 Apr 2024