Expectation of a bumper payout propels its stock to an all-time high
MARKET sentiment on low-cost carrier AirAsia Bhd seems to be on steroids, largely driven by the expectation of a bumper dividend in the near term.
The counter shot to a new all-time high of RM4.60 on March 1 as AirAsia inches closer to the disposal of its aircraft leasing business, Asia Aviation Capital Ltd (AAC).
The airline group will pocket a gain of nearly RM3.8bil from this deal, of which 74.4% is expected to be delivered to shareholders’ pockets in the form of a special dividend.
This means that AirAsia shareholders may anticipate a huge dividend reward of as much as 60 sen to 70 sen per share.
Buoyed by speculation on the special dividend, the stock has rallied in recent times, surging by nearly 36% in the last two months alone.
The Main Market-listed company, which has largely been on an uptrend since 2015, has a market capitalisation of RM15.21bil with a price to earnings ratio of 9.58 times.
Over the last three years, its dividend distribution has grown by almost 82%.
AirAsia’s 12-month yield stands at 5.27%.
While the anticipated special dividend has lifted expectations on the stock, the bigger question now is whether AirAsia can deliver more than just high dividends in 2018?
Analysts are predominantly sanguine on AirAsia’s prospects.
A quick check on Bloomberg shows that 14 research houses have issued “buy” calls while seven others recommend a “hold”.
Two research firms have “sell” calls on AirAsia.
One of the key reasons for the optimistic outlook is AirAsia’s strategy to pursue an asset-light business model moving forward.
By going asset-light in a highly competitive business environment, AirAsia will be able to keep its future capital expenditure requirements low and instead use cash for operational improvements.
StarBiz reported in November last year that selling non-core assets would help AirAsia become more transparent and have better accountability while at the same time drive cost efficiencies by partnering industry experts.
The divestments of stake in AAC is in line with this strategy, apart from AirAsia’s intention to deliver a special dividend once in every two to three years.
BBAM Ltd Partnership, the world’s largest manager of aircraft leasing portfolios, will be acquiring AAC for US$1.18bil (RM4.619bil) via its managed entities, Herondell Ltd, Incline B Aviation Ltd Partnership and Fly Leasing Ltd.
Through this deal, AirAsia will ultimately dispose a total of 84 aircraft and 14 aircraft engines by AAC to BBAM’s managed entities.
Following the sale, 79 aircraft and 14 engines will be leased back to AirAsia and its affiliates for the duration of up to 12 years.
Upon the completion of AAC disposal, CIMB Research expects AirAsia’s net gearing to significant improve to only 18% in the current financial year of 2018 (FY18).
“The transaction is expected to completed by the third quarter of FY18 and will need shareholders approval at an extraordinary general meeting.
“The sale of 84 planes and 14 engines will see RM7.1bil of aircraft financing transferred to BBAM and RM967.1mil in exceptional disposal gains for AirAsia, resulting in a drop in AirAsia’s net gearing from 116% in FY17,” states the research house.
Higher target price
CIMB Research has maintained its “add” call on AirAsia, with a raised target price of RM5.31.
AirAsia will also see more aircraft disposals moving ahead as the low-cost carrier has entered into agreements with the same BBAM-managed entities to sell approximately 98 aircraft to be delivered in the future up until 2025.
In its published note, MIDF Research says that while the purchase consideration is yet to be known, the cumulative estimated original cost of investment for the 98 aircraft amounted to about RM45.8bil.
“We believe AirAsia’s has a bright prospect given its long-term strategic plan of monetising assets while crystalising its efforts to enhance the group core business which will strengthen its low cost carrier brand in the global market,” it says.
MIDF Research also adds that AirAsia’s management has hinted on further non-core asset monetisation namely AAE Travel Pte Ltd (the operator of travel booking site Expedia) and Santan (AirAsia’s in-flight food business).
AirAsia has divested 25% of its stake in AAE Travel previously to Expedia Inc for US$86.25mil or RM306.18mil.
“We view this string of divestments will continue to drive excitement among investors over special dividends,” it says.
AirAsia hived off its 50% stake in Asia Aviation Centre of Excellence (AACE) for US$100mil in November last year. Earlier in January 2018, it also disposed a 38.6% stake in Ground Team Red Holdings (GTR) to Singapore-listed ground handling and in-flight catering services provider SATS Ltd for S$119.3mil.
Disposals aside, AirAsia is currently looking at increasing its fleet size further in 2018 as it seeks to cover more destinations regionally.
The low-cost carrier will deploy a net addition of 30 aircrafts, which will see its markets in Malaysia, Thailand and India receiving seven aircrafts each.
Meanwhile, Indonesa and the Philippines will receive three and six aircraft respectively.
In comparison, AirAsia increased its aircraft portfolio by 14% year-on-year in 2017.
According to Affin Hwang Capital Research, AirAsia has added 24 aircraft in 2017, pushing its group fleet size to 196 aircraft.
Malaysia, Thailand and India saw the most additions, with seven, five and six new aircraft respectively.
With more routes in mind, coupled with the growing demand among air-travellers in the region, AirAsia remains positive that the overall results of the group in 2018 may be better than 2017.
For its financial year ended Dec 31, 2017, AirAsia’s net profit rose marginally to RM1.64bil from RM1.62bil in the previous corresponding period, while revenue increased to RM9.71bil from RM6.85bil a year earlier.
It is worth noting that AirAsia’s FY17 earnings has exceeded the consensus expectations
The group has delivered an additional 3.93 million seats in 2017 as compared to a year earlier, which represents an additional 10% growth in capacity.
In an earlier press release, AirAsia group chief executive officer Tan Sri Tony Fernandes points out that the airline company plans to tap into the region’s travel demand, which is still largely unmet by current offerings.
“Asean, Indian and Japanese travellers alike want to travel more and travel low cost.
“AirAsia is optimistic about the growth potential of low-cost air travel, and the potential of our fares to stimulate and grow new markets.
“We look to more than double our current fleet of narrow-body aircraft, now over 200-strong, to a 500-strong fleet by 2027,” he says.
In a note, Maybank IB Research says that AirAsia will likely face escalating competitive pressure in 2018, which will negatively impact on yields and loads.
It also says that AirAsia’s share price could be under pressure moving forward.
However, it believes that “the appeal of dividends is too strong to ignore”.
“Yields have declined by 3.7% year-on-year in the fourth quarter of FY17 but load factors have remained steady.
“AirAsia will have to focus on higher productivity and efficiency gains to boost its profits.
“There is a potential of a 23 sen per share special dividend to be approved at the next AGM on May 2018. Combine the normal dividend of nine sen per share (based on 25% payout on reported earnings) and a special dividend, AirAsia offers a prospective FY18 dividend yield of 7%,” it says.