• Divesting its 50% stake in AACOE

• Not surprised but positive on sale consideration

• Sale valued at FY16 price-to-earnings ratio of 17.7x

• One-off gain on disposal expected to be booked in 4QFY17

• Maintain BUY with unchanged TP of RM3.94

Divesting its 50% stake in AACOE. AirAsia announced that it has executed a Share Purchase Agreement (SPA) to dispose its 50% stake in the Asian Aviation Centre of Excellence Sdn Bhd (AACOE) to its JV partner who operates the academy, CAE International Holding Ltd (CAE) for US$100m (RM429.3m). The disposal does not require shareholders’ approval. However, consent from the Department of Civil Aviation (DCA) is required.

Not surprised but positive on the sale consideration. While the sale itself did not come as a surprise to us (CAE had confirmed it was in advanced talks to purchase the remaining 50% stake in AACOE during a recent conference call held early August), we are positive on the divestment value of US100m (RM429.3m). Earlier in the year, AirAsia had estimated AACOE to be worth RM355m (14.6x). Hence, the upside was a bonus, in our view.

The sale translates to a FY16 price-to-earnings ratio of 17.7x, based on FY16 earnings of RM48m which we think is fair. The purchaser, CAE trades at a slightly higher multiple of 20x trailing earnings due to its larger market capitalisation of CA$5.4b (RM18.5b). There are few other direct comparable companies. Meanwhile, the disposal allows AirAsia to focus on its core commercial aviation business and would not be required to make further investments in AACOE. We gather that CAE intends to expand AACOE, to cater to the growing aviation training requirements of the ASEAN region.

One-off gain on disposal expected to be booked in 4QFY17. AirAsia expects to realise a gain on disposal of RM187.6m at AirAsia Group level upon completion slated for November 2017. In the meantime, we make no changes to our earnings forecast as the RM24m JV contribution is expected to be largely offset by a reduction in interest expenses or interest income seeing that management intends to use the proceeds for working capital and liquidity purposes.Sale of its leasing arm imminent? The divestment marks the first of a string of planned divestments, where AirAsia intends to unlock the value of its private equity investments which it believes are underappreciated. Group CEO, Tan Sri Tony Fernandes was quoted by the media that the sale of its leasing arm, Asia Aviation Capital (AAC) is not facing any roadblocks with an announcement imminent. We expect the sale of AAC to lead to special dividends.

Maintain BUY with unchanged TP of RM3.94. Our TP derived from a forward price-to-earnings ratio of 10x FY18 EPS. Airasia remains our top aviation sector predicated on: 1) stable demand growth with conservative ASK expansion of +10%; 2) monetisation of AAC that could potentially lead to special dividends; 3) further consolidation of all AOCs under the AirAsia Group could provide better clarity on combined performance of all AOCs as opposed to MAA.

Source: MIDF Research - 28 Aug 2017