AirAsia - Proposed Placement to Tune Live

AirAsia announced that it has entered into a conditional subscription agreement with Tune Live Sdn Bhd, which is equally owned by both Tan Sri Dr Anthony Francis Fernandes and Datuk Kamarudin Bin Meranun. The proposed placement will see an issuance of 559m new ordinary shares, representing 16.7% of its enlarged share base which would increase its capital from 2.8bn to 3.3bn shares of RM0.10 each. The shares will be issued at an issue price of RM1.84 per share via cash. We are downgrading our call to Neutral due to limited upside. Our new target price of RM2.00 (previously RM1.88) is pegged on 8x FY17F (previously 10x FY16F). Our forecast is based on enlarged share capital and we include in the new additional income from maintenance of leased aircrafts to its associates for FY16F-18F.

• Details of the placement. The indicative price of RM1.84 for the placement was based on its 5-market day volume weighted average price (VWAP) up to 31st March 2016, and on the basis of no dividend being declared or paid. Based on an adjusted issue price of RM1.80 (on the basis of the new share issuance not being entitled to the first and final dividend of FY15), the exercise will raise cash proceeds of c.RM1bn, and is expected to be completed by 3QFY16 subject to approval from shareholders and any other regulatory authorities (e.g. Bursa Securities and BNM).
• Utilisation of proceeds. The gross proceeds of c.RM1bn from the placement will be used for the prepayment and repayment of debt, financing of aircraft acquisitions, engines and parts, pre-delivery payments of aircraft, general corporate and working capital, and the expenditures. It is expected to generate an annual interest savings of c.RM10.7m from the prepayment of bank borrowings, while net gearing level will reduce from 2.0x to 1.6x for FY16F.
• Rationale of the placement. We understand that a placement exercise is the best option for the group to strengthen its balance sheet without having to incur additional borrowings and related interest expenses compared to issuing Medium Term Notes. However, it is expected to have a dilutive effect on AirAsia’s EPS. Based on the enlarged share capital of 3.3bn shares, our forecasted FY17 EPS will be diluted by approximately 7% to 25.0 sen from 28.7 sen.
• Downgrade to Neutral. We are downgrading our call to Neutral due to limited upside. Our new target price of RM2.00 (previously RM1.88) is pegged on 8x FY17F (previously 10x FY16F). The reduction in multiples is due to on-going volatility in oil and currencies. The forecast is based on enlarged share capital and we include in the new additional income from maintenance of leased aircrafts to its associates for FY16F-18F.