Bursa has approved CapA’s PN17 restructuring proposal – disposing its aviation operations to AAX (to be renamed AAG) for a consideration of RM6.8bn. Post restructuring, CapA will continue to focus on the growth of the airline support business segments (Capital Aviation Services, Logistics, MOVE digital and CAPI), leveraging onto AAG’s expansion while still owing an 18.5% stake in the latter, and existing shareholders of CapA will also own direct shares in AAG (via share distribution by CapA). AAG will effectively consolidate and expand the short-medium-long haul aviation business, leveraging onto the new A321 fleets. We are positive with the exercise and expect the group to ride on the tailwinds from USD depreciation, drop in oil prices and continued strong air travel demand. Maintain BUY with an unchanged TP: RM1.68, based on implied RM6.8bn valuation on the aviation business and conservative RM2.15bn valuation of its airline support business (based on 1x FY23 revenue). We expect further potential upside to our TP, should the PN17 exercise be successfully executed.

PN17 restructuring. Bursa Malaysia has approved Capital A’s (CapA) proposal to: (i) dispose AAAGL (Indonesia, Thailand, Philippines and Cambodia operations) for a consideration of RM3bn (to be satisfied by new share issuance by AAX (to be renamed as AirAsia Group – AAG) for 2.3bn shares based on RM1.30/share); (ii) dispose AAB (Malaysia aviation operation) for a total consideration of RM3.8bn (to be satisfied by AAG assuming CapA’s debt); and (iii) distribution of 1.7bn shares of AAX (from the proceeds of AAAGL disposal) to entitled CapA shareholders. The group will conduct an Extraordinary General Meeting (EGM) on 14 October 2024 for shareholders’ approval. Prior to the exercise, AAB’s existing 57.1m shares in AAX will be transferred to CapA for RM106.7m (based on RM1.87/share).

CapA. Post restructuring, CapA will still retain ownership of the 4 major business segments namely: (i) Capital Aviation Services (ADE MRO services, Santan catering & DARTS share services); (ii) Logistics (77.6% Teleport); (iii) MOVE digital (96.2% MOVE SuperApp, 99.6% BigPay, A-rewards, Ikhlas.com & OUTCLASS academy); and (iv) CAPI (AirAsia branding co). CapA will also still own a 18.48% stake (tentative) in AAG, which management guided will be fully distributed via dividend-inspecie to entitled shareholders within the next 1-2 years (depending on CapA’s retained earnings/shareholder capital). Management intends to continue scale-up the 4 major business segments and eventually monetize their valuation via listing exercise (management has assessed a preliminary valuation of RM1.88- RM3.22/share). CapA’s equity position is expected return to a positive position of RM649.4m (assuming no conversion of outstanding RCUIDs and warrants) to RM2.0bn (assuming full conversion of outstanding RCUIDs and warrants), effectively allowing it to exit the PN17 status. In subsequent stage, CapA will acquire back GTR ground handling services from AAG (valuation to be determined).

AAX. Post restructuring – acquiring 100% of AAB and AAAGL from CapA – AAX will consolidate the aviation operations for all short, medium and long hauls, and rename itself as AirAsia Group (AAG). Prior to the acquisition, AAG will first issue free warrants to existing shareholders based on 1 warrant for existing 2 shares (223.5m warrants) and undertake a private placement exercise to raise RM1bn (to be issued up to a 15% discounted price to its 5 day VWAP) in order to strengthen the group’s balance sheet. Post completion, AAG’s share base will be enlarged to 3,639.7m shares with 223.5m warrants (from current 447.1m shares). CapA will own 18.5% stake in AAG, while shareholders of CapA will own 46.3% (collectively) and private placement subscribers will own 24.6%. AAG will also be granting share options to Garynma investment to subscribe 12% of the total enlarged share base (up to 450.6m shares) via 3 Subscription Options of 4% each.

Approval and timeline. CapA and AAX will need to get approval from shareholders (including RCUIDs holders) and relevant regulators as well as financiers/lenders. The exercise is expected to be completed by 1QFY25.

Positive. We are overall positive on the exercise mainly on the streamlining of the aviation segments to be consolidated under AAG, in strengthening the business model for long haul–short haul integration, with a new medium haul segment as the intermediary, by leveraging onto the new A321 fleets. AAG will be in a much stronger position to compete effectively against the established full service carriers such as SIA, Emirates, JAL, etc. Shareholders of CapA will benefit from it exiting PN17 status, CapA’s new focus will be on the growth of the aviation support business segments, leveraging onto AAG’s growth and new shareholdings in AAG. The group is currently riding on strong tailwinds of: (i) depreciation of USD (against regional currencies, especially MYR and THB); (ii) drop in global oil prices; and (iii) continued strong demand for regional air travel.

Forecast. Unchanged for now.

Maintain BUY, TP: RM1.68. We reiterate our BUY recommendation with TP: RM1.68 based on implied RM6.8bn valuation on the aviation business and conservative RM2.15bn valuation its airline support business (based on 1x FY23 revenue). The group is currently benefitting from USD depreciation, drop in oil prices and continued strong demand for air-travel, resulting to improving yields. We expect further potential upside to our TP should the PN17 regularisation plan be successfully executed and investors start to appreciate CapA’s new structure.

Source: Hong Leong Investment Bank Research - 27 Sept 2024