Capital A, AAX overhaul is looking up

AirAsia staff at an event. The firm’s consolidation exercise might be further sweetened for AAX by the strengthening of the ringgit over the past few months.

GETTING Bursa Malaysia to approve Capital A Bhd’s restructuring plan is a huge relief for its head honcho, Tan Sri Tony Fernandes, and his team after going back and forth with the regulator for two years.

The clearance from Bursa means the company is closer to exiting its Practice Note 17 (PN17) status, as it has proposed to divest its entire aviation operations to sister company AirAsia X Bhd (AAX).

The restructuring will see Capital A selling its entire interest in AirAsia Aviation Group Ltd (AAAGL) and AirAsia Bhd (AAB) to AAX for a total of RM6.8bil, with AAX to be renamed AirAsia Group upon completion of the deals.

The disposal of AAAGL, worth RM3bil on its own, will be satisfied by a new share issuance by AAX for approximately 2.3 billion shares based on the price of RM1.30 each, while the RM3.8bil deal for the disposal of AAB will be fulfilled by AAG assuming Capital A’s debt.

Additionally, the group will also carry out the distribution of 1.7 billion shares of AAX from the proceeds of the AAAGL disposal to entitled Capital A shareholders.

But the work is far from done as the restructuring exercise will still require shareholders’ approval, which Capital A and AirAsia X will seek in mid-October.

Having said that, it appears that analysts and industry investors alike are positive on the transactions proposed by the group.

Hong Leong Investment Bank (HLIB) Research expects Capital A to kick on from here, riding on the tailwinds of the US dollar depreciation, falling oil prices and continued strong air travel demand.

The research house points out that post-restructuring, Capital A will continue to focus on the growth of its airline support business segments, namely, aviation services, logistics, its travel application MOVE, as well as brand management platform Capital A International.

“At the same time, the group will continue leveraging onto AAG’s expansion while still owning an 18.5% stake in the latter, and existing shareholders of Capital A will also own direct shares in AAG via the share distribution,” it adds.

HLIB Research says the streamlining of the aviation segments to be consolidated under AAG will strengthen the business model for long haul-short haul integration, with a new medium-haul segment as the intermediary, leveraging on the new A321 fleets.

“AAG will be in a much stronger position to compete effectively against the established full-service carriers such as Singapore Airlines, Emirates and Japan Airlines.

“Shareholders of Capital A will benefit from it exiting the PN17 category, and its new focus will be on the growth of the aviation support business segments, leveraging AAG’s growth and new shareholdings in the latter,” says the brokerage, while maintaining its “buy” call and target price of RM1.68 for Capital A.

Meanwhile, seasoned investor Ian Yoong, while also viewing the restructuring initiative as a “sweetheart deal for Capital A”, says there are also significant benefits to AAX.

He observes that the consolidation of Capital A’s short-haul aviation business will enable AAX to become the leading low-cost carrier in the Asia-Pacific region, leading to cost optimisation, with AAX offering a seamless network of short-haul and long-haul flights.

“It will provide greater connectivity for passengers as well, operating under one umbrella,” he comments.

Looking at the broader picture, Yoong notes that delivery of new aircraft has slowed down since the beginning of the year, with the ongoing strike at Boeing’s Seattle, Portland and Southern California factories crippling production.

For context, on Sept 13, more than 33,000 machinists at aircraft maker Boeing commenced a strike, with the International Association of Machinists and Aerospace Workers reporting that 94.6% of workers voted to reject a contract promising a 25% pay raise over four years.

Additionally, Yoong says the supply chain of the aviation industry is still reeling from the impact of lockdowns, and hence, the additional planes from a sister airline will be a boost for AAX.

This consolidation exercise might be further sweetened for AAX by the strengthening of the ringgit over the past few months, as he points out that Capital A had incurred a foreign-exchange loss of RM436mil in the second quarter of 2024 (2Q24).

“Finance costs for operating aircraft and non-operating aircraft were RM118mil and RM77mil, respectively. A back-of-the-envelope calculation shows that the net loss would have been reduced to about RM40mil under present circumstances,” Yoong estimates.

Pursuant to that, he says the elephant in the room is that the proposed RM6.8bil disposal of AirAsia Bhd and AirAsia Aviation Group Ltd to AAX will lead to a pro-forma gain of over RM18bil when the transfer of accumulated losses in the aviation business is included, judging from what Capital A has reported.

The question is would Yoong give the deal a nod if he were a shareholder of Capital A or AAX? The investor offers a thoughtful suggestion.

“If I were a shareholder of AAX, I would arbitrage by selling AAX and investing in Capital A.

“If the deal goes through, shareholders of Capital A are expected to receive 1.69 billion AAX shares priced at RM1.30 in the exercise as compared to AAX’s market price of RM1.64.

“This works out to about 400 shares of AAX for every 1,000 Capital A shares owned,” he says, giving an investor a stake in both companies, and hence exposure to all the business spheres across the activities that Capital A and AAX (AAG going forward) are involved in.

Meanwhile, Khair Mirza head of airportIR and industry research, Modalis Infrastructure Partners firm believes shareholders are likely to accept the offer as existing shareholders have a chance to own probably the best known low-cost carrier (LCC) brand in Asia that has consistently won best in class awards.

“Considering that AAX itself has not enjoyed the same level of profitability or consistency, it may be perceived to be a good opportunity.

“Indigo Airlines and Southwest Airlines, which are probably the largest public-listed private LCCs in Asia and globally, respectively, trade at 20-25 times forward price earnings ratios. However, all other comparable public-listed LCCs tend to trade in single-digit multiples save for one or two exceptions,” he explains.