AirAsia’s announcement on its IDR2,058bn subscription for IAA’s PCS still lacks clarity on whether local investors/partners have participated in the remaining portion of the IDR4,200bn total. Maintain BUY and MYR2.68 TP (113% upside) as management did say the negative equity issue that had earlier put IAA’s operations at risk was now resolved.

Conversion of debt to “equity”. AirAsia said it was taking up 49% of itsentitled portion on Indonesia AirAsia’s (IAA) IDR4,200bn perpetual capital securities (PCS). The 49% portion with a nominal value of IDR2,058bn subscribed by AirAsia is to be funded by converting the IDR2,058bn receivables due from IAA. Hence, no cash-raising is needed. As at end-June, receivables due from IAA sitting on AirAsia assets have accumulated to IDR4,280bn. Key salient terms are a 12% periodic distribution rate annually (payable semi-annually) and, although perpetual in nature, there is a call option to redeem. The first call date is in the seventh year of the issuance. If not redeemed by then, the distribution rate steps up by 5%. AirAsia did not reveal whether there were any takers for the remaining 51% of the PCS, but we understand from management that IAA was able to get local investor(s) to subscribeto its PCS, though no names were disclosed. Due to the recapitalising exercise from the PCS issuance, from an accounting treatment perspective, AirAsia would need to recognise a MYR474.2m one-off loss (as at 1H15) this year to reflect the reversal of its share of unrecognised losses in IAA accumulated. This has no impact on our core earningsforecast and TP as we have already factored in AirAsia’s share of “unrecognised losses” from its affiliates to compute its core earnings.

Questions to ponder. IAA’s negative equity now stands at IDR4,378bn. Assuming AirAsia is the only subscriber for the PCS, its IDR2,058bnsubscription amount falls short of addressing IAA’s negative equity issue . Recall that Indonesia’s Transortation Ministry had set a 30 Sepdeadline for IAA to attain positive equity position. We shall await further clarification from AirAsia in the next few days, although management said that the positive equity requirement has now been met.

Maintain BUY and MYR2.68 TP, (10x FY16F P/E, lower than peers’11x average). Based on RNAV (Figure 1), the share price reflects total impairments of MYR2.96bn, which is deemed excessive. Indirectly, only MYR624m has been hit on the balance sheet so far due to the PCS. We also foresee a favourable earnings outlook for AirAsia going forward,with IAA and Philippines AirAsia (PAA) turning around come FY16.