Kenanga Research is positive on Capital A Bhd’s comprehensive consolidation plan that involves the transfer of all of its short-haul businesses to sister company AirAsia X Bhd (AAX), which currently only operates only mid-haul flights.
It said the plan involves short haul businesses in Malaysia, Thailand, Indonesia, and the Philippines, and will form part of the proposed regularisation plan to lift it out of the PN17 status.
“The group has entered into a non-binding letter of offer with AirAsia X Berhad (AAX) to divest AirAsia Berhad (AAB) and AirAsia Aviation Group Limited (AAAGL) for a disposal consideration to be agreed upon at a later date.
“The disposal consideration is expected to be satisfied by a combination of cash and issuance of new shares of AAX,” it said in its Company Update today (Jan 9).
The research house said essentially, the exercise is expected to result in greater clarity of investment between Capital A, being the aviation services and digital businesses provider, and AAX, a pure aviation business consolidating both long and short haul routes under the AirAsia brand name.
“This would result in the development of a more focused shareholder base, which is also expected to facilitate a business-centric valuation of the separate entities and potentially unlock value to shareholders.
Last November, Capital A has proposed the listing of a unit, which is the licensee of the AirAsia brand, via a special purpose acquisition company (SPAC), on US’ NASDAQ at an USD1 billion (RM4.77 billion) valuation.
“Once the sale is completed, Capital A will focus on four businesses, namely Teleport, Santan, BigPay, and Asia Digital Engineering Sdn Bhd.”
It maintains its forecasts, TP of RM0.84 and MARKET PERFORM call pending more details upon the signing of a definitive agreement.
“There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.”
However, Kenanga said there could be potential earnings leakages or losses to the group from revenue and profit contribution following the sale of its airlines business to AAX.
It added this is because based on its FY24F net profit of RM250 million for Capital A’s airlines business and applying low cost carriers peers 1-year forward PER of between 7x and 14x, the indicative valuation works out to between RM1.8 billion and RM3.5 billion.
“Based on indicative valuation of RM3.5 billion, our SoP-TP is expected to be raised by 28% from RM0.84 per share to RM1.08 per share.
“However, based on the group’s FY24F consensus net profit of RM446 million, the indicative airlines business valuation works out to between RM3.1 billion to RM6.2 billion which is expected to raise our SoP-TP by 17% to 100% to RM0.98 to RM1.74 per share.”
Looking farther into CY24, the research house projects Capital A’s system-wide revenue seat km (RPK) to grow 20% to an estimated 70 billion in CY24, after recovering by an estimated 24 billion to 58 billion in FY23 based on its forecasts.
“The group reiterated that the passenger throughput recovery is gaining traction. It is targeting to reactivate 187 aircrafts with 161 aircrafts available for operation, and its operating capacity to reach 74% of pre-COVID level, leveraging on the high travel season and the newly established visa-free travel between China and Malaysia starting 1 Dec 2023.”
However, Kenanga noted that the group’s digital segment is expected to remain loss-making.
“airasia Super App is expected to grow, underpinned by the continued resurgence of travel demand from borders reopening and tactical campaigns, alongside expected growth from airasia Food, Ride and Xpress.
“Additionally, Teleport is expected to continue expanding throughout 2024 as it adds new international lanes and delivery hubs. BigPay has also launched its digital lending platform to provide new loan products,” it added.
