Affin Hwang upgrades AirAsia to buy with target price of RM5.20

KUALA LUMPUR: Affin Hwang Capital Research upgraded AirAsia Bhd to buy with a raised target price of RM5.20, based on 12x FY18E price-earnings.

This comes on the back of news that AirAsia's unit Asia Aviation Capital Ltd will dispose of its aircraft leasing operations to entities managed by BBAM Ltd Partnership for US$1.18bil (RM4.6bil).

"AirAsia will receive US$1,085m in cash, US$50m investment in Incline Funds and US$50m subscription of FLY American Depositary Shares.

"Post-transaction, AirAsia will hold a 10.2% stake in FLY, which is a leading global aircraft lessor managed by BBAM. Based on enterprise value of US$2.85bn, the disposal is at an attractive 20% premium to AACL’s net book value. 

"One-off net gain of about RM976.1m or RM0.29/share will potentially lift 2018E EPS by 183%," it said.

The budget carrier will also sell 84 aircraft and 14 engines to entities managed by BBAM and lease back 79 aircrft and 14 engines for its airline operation. 

It will have the option to dispose of the 98 aircraft on order to entities managed by BBAM. 

"Under the lease arrangements, AirAsia will pay total lease rental of up to US$103.7m (RM404.3m) for a 12-month period. 

"After netting off annual interest expense savings (RM110.2m) and depreciation (RM206.2m) for the aircraft, operating costs will increase by RM87.9m or 2.6 sen, potentially reducing 2019E EPS by 5.7%."

Including the 38.6% stake sale in Ground Team Red Holdings to SATS for S$119.3mil in January, total cash proceeds amount to about RM3bil or 89 sen a share. 

"This could used to pay special dividends to shareholders in 2018, giving potential net yield of up to 19%," said Affin Hwang Research.

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