KEY INVESTMENT HIGHLIGHTS

• Submitted proposals to Bursa in its bid to save AAX

• Proposing to raise up to RM500.0m via right issue and SPV subscription

• The company has also revised its proposal to reduce 99.9% of the issued share capital from 90.0%

• No amendment to the proposed debt restructuring

• We looked positively on these proposals

• Maintain SELL with an unchanged TP of RM0.05 per share

Another bold proposal laid on the table. Based on its announcement yesterday, AirAsia X Berhad (AAX) is proposing to raise up to RM500.0m via: (i) rights issue of new ordinary shares in AAX and; (ii) subscription by a SPV incorporated by Dato’ Lim Kian Onn directly, associates, other places. The targeted gross proceeds to be raised via the rights issue is expected to be up to RM300.0m whereas the SPV is expected to raise up to RM200.0m. Furthermore, the announcement disclosed that the SPV has an option to subscribe to an additional 15% of the enlarged total number of AAX shares after the proposed exercises above have been completed. Noteworthy to highlight, the SPV will commit a minimum subscription of RM50 million, subject to final agreement.

Details are scant. Even though the quantum of gross proceeds has been disclosed upfront, pricing of rights shares has not been determined yet – which is likely as it tries to take advantage of possible movement of share prices. However, the management maintained that the timeline of the rights issue will be undertaken after the completion of the debt restructuring and corporate restructuring

Revision to the proposed share capital reduction. Earlier, AAX announced to undertake 90% reduction of its issued share capital. However, the company has revised its proposal to reduced 99.9% of the issued share capital from 90%. This entail a reduction of the issued share capital of the company of approximately from circa RM1.5b to estimated RM1.53m.

No amendment to the proposed debt restructuring. Recall that, one the key parts of the proposal are debt restructuring; debt exercise to restructure ~RM63.5b of debts to be reconstituted into an acknowledgement of indebtedness by AAX for a principal amount of up to RM200.0m. Furthermore, it also entails debt waivers, termination of contracts with related parties and conversion of advance payment and placed deposits to travel credits (refer to Table 1). AAX asserts that these proposals are vital for the survival of the Group as well as its ability to remain a going concern, which requires significant concessions from its suppliers, creditors and financiers.

AAX recent financial standings. To reiterate, based on its 3QFY20 result, AAX’s cash balances and equivalent stood at RM138.82m with OPEX at circa RM280.0m (staff cost made up almost 15% of the cost). Meanwhile, borrowings stood at approximately RM5.6b – which is mainly made up of lease liabilities, circa 80% of the total borrowing amount. These figures only serve to highlight the group financial woes, pinpointing the fact that without significant debt restructuring exercise, AAX may well become among the casualties of the Covid-19 pandemic.

AAX’s survival is highly reliant on the execution of the proposed debt restructuring and fund raising. We believe extraordinary situations call for extraordinary measures. For AAX that is at its existential crossroad, another bold proposal on fund raising and amendment to proposed share reduction exercise are exactly the kind of potent “cure” for the company ailments. We looked positively on these proposals. On another note, should the proposals fell through, AAX could potentially initiate liquidation proceedings.

Vaccine news is good, BUT... We are elated on the recent news of vaccine approval for emergency usage by Pfizer. In general, aviation industry is expected to rebound once travel restrictions are lifted and air travels start to begin in earnest. That said, at this juncture we opine that it will take many more months before air travels to will resume to the pre-Covid19 level that is sufficient to save the industry from further losses while we wait for vaccines to hit the shelves and newly infected cases to be contained worldwide. However, for AAX, the bigger issue will be the completion of its debt restructuring and fund-raising exercise as the company existence is highly reliant on the outcome of these two corporate exercises. Once completed, we opine that the company will be in more comfortable position with lesser baggage on its balance sheet. Without it, AAX future as an airline might continue to be uncertain.

Earnings impact. We maintained our earnings estimate purely for theoretical basis as the pandemic continue to worsen in many parts of AAX key markets.

Target Price. We maintained our target price to RM0.05.

Price has retraced significantly; but maintain SELL. The airline industry is expected to continue to be adversely impacted by the ongoing developed brought upon the Covid-19 pandemic and we reiterate our view that passengers carried are bound for a temporary decline during the virus outbreak and a prolonged recovery of the industry is a non-exaggeration. The operational environment is then further exacerbated by the financial conundrum that AAX is currently facing. As such we are maintaining our SELL recommendation on AAX. We believe that the price appreciation is premature buoyed by market euphoria surrounding the vaccines news.

Source: MIDF Research - 15 Dec 2020