Maintain BUY, with an unchanged MYR2.68 TP (114% upside). AirAsia’s potential rivatisation is still a tricky prospect, depending on whether management attempts a buyout in its own capacity or with a potential consortium. Nonetheless, its current valuation remains undemanding, as the market has already priced in a worst case scenario on its potential impairments. The stock is our aviation Top Pick.

Taking AirAsia private? Yesterday, Reuters reported that AirAsia cofounders Tan Sri Anthony “Tony” Fernandes and Dato’ Kamarudin Meranun (who collectively own 19% via Tune Air SB) are in talks with banks to secure funding to privatise the airline. Using 1x FY15F price-tobook as a yardstick (before accounting for the MYR474.2m in unrecognised losses from Indonesia AirAsia upon the subscription ofperpetual securities), this would lead to a valuation of MYR1.97/share, implying 8.5x FY15F P/E, which we believe is fair. At that price, the funds needed for privatisation would be approximately MYR4.44bn. Our sources indicate there is a possibility of several other parties participating in the exercise too, which would lighten Tune Air SB’s financing burden. However, to maintain AirAsia’s Air Operating Certificate, its foreign shareholding is capped at 45%, with anything exceeding that having no voting rights (as is the case with AirAsia currently). If we assume that Tune Air lifts it stake to 55% from 19% to comply with the local ownership requirements, the financing needed at the 1x P/BV level would be lesser, ie MYR1.97bn. However, this is stillrather substantial for a single party to shoulder. Thus, a privatisationdone via a consortium would be more palatable. These new shareholder(s) could also potentially offer synergy, either from a cost and revenue perspective or by expansion into new markets.

Reiterate BUY. After adjusting for AirAsia’s borrowings, where 57% of its fleet debts were hedged at MYR3.2358/USD, its debt portion in our RNAV calculation would drop to MYR12.4bn (MYR14.4bn previously). Our revised RNAV assessment shows that the stock has priced in a worst case scenario on potential impairments of MYR3.36bn (Figure 1). Even its FY15F BV/share of MYR1.97 has understated the market value of its fleet (and its potential aircraft leasing business) along with a list of other investments. Thus, our BUY rating and MYR2.68 TP (10x target P/E on 12m forward earnings) on the stock remains unchanged. AirAsia is also our aviation sector Top Pick. We expect commendable earnings growth going into FY16 on lower jet fuel prices (with no hedging exposure), which may boost its margins expansion.