Capital A Bhd will dispose its airline business to sister company AirAsia X Bhd (AAX), with the consideration to be negotiated at a later date, in both cash and shares. Pending more details of the deal, we maintain our earnings forecasts, TP of RM0.84 and MAKRKET PERFORM call.

Selling aviation business to AirAsia X Berhad. The group has entered into a non-binding letter of offer with AirAsia X Berhad (AAX) to divest AirAsia Berhad (AAB) and AirAsia Aviation Group Limited (AAAGL) for a disposal consideration to be agreed upon at a later date. A detailed announcement on the proposed disposal will be made upon the signing of a definitive agreement. The disposal consideration is expected to be satisfied by a combination of cash and issuance of new shares of AAX. The proposal is part of a comprehensive consolidation plan that involves the transfer of all short-haul businesses in Malaysia, Thailand, Indonesia, and the Philippines to AAX, which currently operates only mid-haul flights. We are positive on this latest corporate development by CAPITALA which will form part of the proposed regularisation plan to lift it out of the PN17 status.

Essentially, the exercise is expected to result in greater clarity of investment between CAPITALA, being the aviation services and digital businesses provider, and AAX, a pure aviation business consolidating both long and short haul routes under the AirAsia brand name. This would result in the development of a more focused shareholder base, which is also expected to facilitate a business-centric valuation of the separate entities and potentially unlock value to shareholders. Once the sale is completed, CAPITALA will focus on four businesses, namely Teleport, Santan, BigPay, and Asia Digital Engineering Sdn Bhd.

Recall, in Nov 2023, CAPITALA has proposed the listing of a unit, which is the licensee of the AirAsia brand, via a special purpose acquisition company (SPAC), on NASDAQ at an USD1b (RM4.77b) valuation.

Low-cost carrier peers are trading at consensus 1-year forward PER of between 7x to 14x including Ryanair Holdings Plc (11x), Spring Airline Co Ltd (14x), Easyjet Plc (8x), Air Arabia (9x), and Wizz Air Holdings Plc (7x). For illustration purposes, (i) based on our FY24F net profit of RM250m for CAPITALA’s airlines business and applying low cost carriers peers 1-year forward PER of between 7x and 14x, the indicative valuation works out to between RM1.8b and RM3.5b, and (ii) based on indicative valuation of RM3.5b, our SoP-TP is expected to be raised by 28% from RM0.84/share to RM1.08/share. However, based on CAPITALA’s FY24F consensus net profit of RM446m (assuming consensus forecast a bottom line breakeven for its digital business), the indicative airlines business valuation works out to between RM3.1b to RM6.2b which is expected to raise our SoP-TP by 17%-100% to RM0.98-RM1.74 per share.

Consequently, there could be potential earnings leakages or losses to the group from revenue and profit contribution following the sale of its airlines business to AAX.

We maintain our forecasts, TP of RM0.84 and MARKET PERFORM call pending more details upon the signing of a definitive agreement. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

Outlook. Looking farther into CY24, we project CAPITALA’s system-wide revenue seat km (RPK) to grow 20% to an estimated 70b in CY24, after recovering by an estimated 24b to 58b in FY23 based on our forecasts. The group reiterated that the passenger throughput recovery is gaining traction. It is targeting to reactivate 187 aircrafts with 161 aircrafts available for operation, and its operating capacity to reach 74% of pre-COVID level, leveraging on the high travel season and the newly established visa-free travel between China and Malaysia starting 1 Dec 2023. Its digital segment is expected to remain loss-making. airasia Super App is expected to grow, underpinned by the continued resurgence of travel demand from borders reopening and tactical campaigns, alongside expected growth from airasia Food, Ride and Xpress. Additionally, Teleport is expected to continue expanding throughout 2024 as it adds new international lanes and delivery hubs. BigPay has also launched its digital lending platform to provide new loan products.

We continue to like CAPITALA for: (i) it being a beneficiary of the recovery in air travel post pandemic, (ii) its growing digital business, leveraging on its strong AirAsia brand and AirAsia’s existing client base, and (iii) its dynamic and visionary leadership that should help steer it out of the current financial difficulty. However, we are mindful of it still being under the PN17 status.

Risks to our recommendation include: (i) the recovery in air travel stalls amidst a global recession, (ii) sustained high jet fuel prices, rendering air travel, especially low-cost air travel unaffordable, (iii) CAPITALA’s inability to lift itself out of the PN17 status, and (iv) persistent cash burn at its digital assets.

Source: Kenanga Research - 9 Jan 2024