AirAsia’s capital raising is positive, but issuance of free shares is not

INVESTORS buying into forward prospects have to be mindful of forward liabilities and corporate governance issues surrounding AirAsia Group Bhd’s capital raising exercise.

Perplexed by the budget carrier’s proposal to issue new shares at no cost to key executives, UOB Kay Hian Research is questioning the rationale of such move at a juncture when AirAsia is facing substantial forward liabilities after having disposed of its fleet.

In terms of valuation, AirAsia is trading at about four times post placement 2021 estimated  book value per share (BVPS) but the carrier also has circa RM6 bil in lease and maintenance liabilities from 2021-2023, according to the research house.

“Even after factoring in a full recovery by 2023, we do not expect AirAsia to generate the RM6 bil in operating cash flow by the same period,” justified UOB Kay Hian Research.

“AirAsia’s ability to raise ticket prices could also be challenging given almost RM1 bil in forward sales liability.”

AirAsia has recently proposed a share grant scheme (SGS) to selected senior executives of the firm at no cost to SGS grantee. The grants can be in the form of shares or cash settlement at the discretion of a committee.

The proposal is valid for a period of six years – and together with an employee share option – AirAsia could issue up to 10% new shares. No details were provided in terms of the number of eligible senior executives.

Additionally, AirAsia is mooting further capitalisation via a one-for-two rights issue at RM1 which would raise up to RM2 bil in equity, assuming full take-up rate.

The rights proceeds along with a 20% placement would raise RM2.5 bil within the upper range of AirAsia’s guidance of RM2 bil-RM2.5 bil range for new capital, according to UOB Kay Hian Research.

Presently, the top five shareholders prior to the latest placement hold only 45% of the outstanding shares of the firm.

The research house expects a substantial quantum of the proceeds will be used to repay outstanding leases of about RM1.5 bil-RM1.6 bil incurred in 2020.

“AirAsia should incur another RM2.1 bil-RM2.2 bil in lease payables for 2021 along with substantial interest costs on the deferred payment,” projected UOB Kay Hian Research.

“Overall, we expect AirAsia to be about RM1.17 bil in the red for 2021 and book value per share (BVPS) for 2021 post rights is estimated at 30 sen.”

Thus far, AirAsia has placed out 470.3 million shares or 70.4% of its targeted placement of new shares at a weighted average price of 71.5 sen, a substantial premium of estimated pre-placement end-2020 book value of 15sen/share and street’s average target price of 46 sen (fair value estimates range from a low of 8 sen to a high of 77 sen).

“Assuming that AirAsia places out a final tranche at 86.5 sen/share, we estimate total proceeds of RM502.8 mil and BVPS on a diluted basis would then amount to 25 sen,’ opined the research house.

All-in, UOB Kay Hian Research maintained its “sell” rating on AirAsia with an estimated value of 68 sen (up from 53 sen previously).

“We value AirAsia by discounting 2022-2023’s earnings per share (EPS) at 8% cost of equity. For 2023, we have estimated RM2.2 bil in net profit,” noted the research house.

“The resultant figure of 43 sen is added back to post placement BVPS, deriving a fair value of 68 sen.” – March 23, 2021

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