In the limelight again. In the past few weeks, AIRASIA hogged the limelight again for several reasons: (i) placement exercise by the founders that will raise their effective stake to 32.4% from their existing 18.9%, (ii) 10x hike in charges proposed by the Department of Civil Aviation, and (iii) the suspension of Rayani Air. We believe these events would have raised much interest as well as confusion among investors, especially the founders’ move in raising their stakes at this point of time and not at an earlier time.

Is the placement necessary? According to AIRASIA, the rationale for the placement exercise is to pare off debt, CAPEX and headquarter, amounting to RM1.0b. However, we already expected its net gearing to reduce from 2.3x to 2.0x in FY16 prior to the placement exercise while its interest coverage ratio of 2.5x is considered comfortable for the highly-geared airlines industry. To recap, AIRASIA’s debt interest coverage ratio dipped to a low of 1.5x back in 2Q14 and yet was still traded at a PER of 18.9x and PBV of 1.9x. On such balance sheet, AIRASIA will still be able to continue with their expansion plans. Historically in FY08 with high net-gearing as high as 4.1x and negative interest coverage ratio, it still managed to trade at 0.9x PBV back then.

Dilutive but essential. “Why are Fernandes and Kamarudin agreeing to pump in RM1bil now and pay RM1.84 a share when during the height of the crisis, the shares had fallen to 78 sen? Of course, we had thought about it then ... but there was so much volatility at that point, Tan Sri Tony Fernandes explains”, was the recent interview excerpt from The Star (9/4/16). Clearly, the privatisation idea has been mulled over by both of them. We believe that while they had the intention to increase their stake back then, we reckon that it did not happen probably due to the timing in securing financing as the sell-down of AIRASIA’s shares happened too abruptly.

Why new placement of 20%? Nine months after the sell down, we believe the founders are well prepared to take up a new placement of 20% in AIRASIA injecting c.RM1.0b into the company. We questioned why 20% but not 10%, 12% or 15%? Post placement, the founders would effectively own 32.4% of AIRASIA, or just slightly below the Mandatory General Offers’ (MGO) threshold of 33.0%. This is a smart move by both Fernandes and Kamarudinin raising their combined stake to 32.4% as a preventive measure against further sell-downs, as they could always increase their stake easily to trigger a MGO should there be any sharp sell-down in AIRASIA’s shares in the future.

MARKET PERFORM maintained. Now that shareholders’ confidence is renewed, DCA fees hike to be staggered over time, and Rayani Air being suspended, AIRASIA’s outlook looks promising, driven by low jet fuel prices and the improvements on its associates. While we are upgrading our Target Price to RM2.19 based on 9.0x FY16E FD PER (3-year Fwd -0.5SD) from RM1.86 (1.0x FY16E PBV), we are maintaining our MARKET PERFORM call on AIRASIA as we believe that market has priced in the positive factors.

Source: Kenanga Research - 18 Apr 2016