Ca talyst gaining visibility. With more details revealed about AirAsia’s (AIRA) potential divestment of leasing arm Asia Aviation Capital (AAC), we are gaining confidence on the publicised USD1bn valuation of the unit, and more importantly net asset value accretion for the group from a majority stake sale. Our estimates suggest book value upside of up to 15% if AIRA’s sells 80% of its stake in AAC. Maintain BUY.

Divestment may lift book value, leading to special dividends. AIRA has revealed that it intends to inject a further 45 planes into AAC, in addition to novating one-third of its new aircraft orderbook. We think these moves may indeed allow a valuation of the unit to exceed USD1bn, assuming 1.5x P/BV multiple. As such,we estimate that a divestment of an 80% stake in the unit can lead to a disposal gain of c.RM1.27bn, leading to book value accretion of up to 15%, and reducing net gearing to 0.3x from 1.3x. Furthermore, AIRA may opt to distribute the sale proceeds, less debt repayments, as a special dividend, which may range up to RM0.38 per share.

Core outlook underpinned by domestic market leadership. AIRA’s core Malaysian operations are expected to continue performing well, as it plans to expand with up to 8 new fleet in 2017 (from 77 currently).In addition, the group has hedged up to 75% of expected fuel requirements for 2017 against risks of rising jet fuel prices.

Valuation:

Reiterate BUY.Our current TP of RM3.25 is based on 1.3x (historical mean, from 1.5x before) P/BV, after adjusting book value for expected unrecognised associate losses.

Source: Alliance Research - 14 Mar 2017