INVESTMENT HIGHLIGHTS

• AirAsia completed the share-swap agreement of its subsidiary with SATS Ltd. (“SATS”)

• Gain on disposal worth ~RM360.2m

• Positive on the news due to ability to leverage on SATS expertise in passenger and ramp handling that will improve turnaround time

• No impact on core net earnings

• Maintain BUY with unchanged target price of RM4.02

JV partnership with SATS on ground handling unit. On the proposed JV partnership between AirAsia with SATS dated 30 October 2017, both parties have yesterday completed the share-swap agreement transaction (please refer to appendix for the full transaction). In the next step of the agreement, AirAsia shall transfer 38.6% of its equity stake in GTRH (the JV company formed between AirAsia and SATS) to SATS for a consideration of RM360.2m.

Positive on the news… Upon the completion of these exercises, both AirAsia and SATS will have an equal ownership in the joint investment vehicle. GTRH will hold majority stakes in both AirAsia and SATS ground handling subsidiaries, Ground Team Red Sdn Bhd (GTR) and SGSS respectively. Accordingly, both companies will be responsible for growing the ground handling business in their respective markets and will explore expansion into Indonesia, the Philippines and Thailand.

…as the partnership will complement AirAsia’s expansion plan. We opine that the move is positive for AirAsia, considering the favourable fast-growing travel landscape of Asean. This would bode well with AirAsia’s expansion plan up until 2027 with planned capacity of 500 planes. We believe having an efficient ground handling service is crucial to enhance its low-cost business structure. Additionally, we believe further improvement in turnaround time is likely, leveraging on each parties’ expertise to enhance efficiency and drive down operational costs.

No impact on core net earnings. We make no changes to our earnings forecasts as we treat this gain as a one-off item. Despite AirAsia divesting 49% stake in GTR Malaysia, we note that AirAsia’s ground handling cost will remain unchanged as communicated by management in the latest third quarter results briefing.

Special dividend may be on the horizon. We believe there is a possibility of a special dividend. This is premised on management’s promise to pay out proceeds of business disposal. Assuming 100% pay-out of the RM360.2m gain, the special dividend is estimated to be 10.8sen.

Maintain BUY with unchanged TP of RM4.02. We maintain our BUY recommendation for AirAsia. Our TP is derived from a forward price-to-earnings ratio of 10x FY18 EPS. We like Air Asia because of the company continuous efforts to reinvent itself (such as by introducing new digital offerings) to ensure that it stays relevant in the highly competitive industry. Air Asia remains our top pick for the aviation sector predicated on: 1) stable demand growth with conservative ASK expansion of +10.0%, and 2) new areas of growth in Air Asia India and Air Asia Japan.

Source: MIDF Research - 5 Jan 2018