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AirAsia weighs Hong Kong RTO to list associates

AirAsia weighs Hong Kong RTO to list associates

HONG KONG: AirAsia Group is weighing a reverse takeover (RTO) exercise to fast-track the listing of some associate airlines, with a number of potential targets already identified on the Hong Kong Stock Exchange (HKEX), sources say.

According to sources, the RTO path is one option being considered to list Indonesia AirAsia (IAA) and Philippines AirAsia (PAA). It is understood that bankers have been briefed on the potential plan, though a final decision had not been made at the time of writing.

If the plan is pursued, IAA and PAA may be injected into a HKEX-listed entity following the RTO exercise. However, people familiar with the matter say a possible RTO in Indonesia’s stock exchange to list IAA had not been completely dismissed either.

It is understood that ideally, the group wants both affiliates listed by mid-2017. A successful RTO in HKEX may also lead to what AirAsia co-founder Tan Sri Tony Fernandes calls ASEAN Holding Co, an entity intended to house the airline group’s entire Asean operations.

Last November, Fernandes said AirAsia wants to list ASEAN Holding Co in HKEX but did not provide a timeline. Reuters reported that AirAsia wants to list IAA and PAA next year before looking at an initial public offering (IPO) exercise for ASEAN Holding Co.

In July, Fernandes tweeted that AirAsia’s future may include “dual listing”, suggesting ASEAN Holding Co may also be listed in Malaysia. When contacted by The Edge, Fernandes declined to comment.

While the RTO option is likely to be more expensive, it is also seen to be faster than the traditional IPO route. That is especially true for loss-making PAA, which reported a pre-tax loss of RM266.6 million from RM768 million in revenue in the financial year ended Dec 31, 2015 (FY2015).

For the nine-month period up to Sept 30, 2016 (9MFY2016), PAA is sitting on a pre-tax loss of RM142 million from a cumulative revenue of RM671.13 million, based on AirAsia’s quarterly reports.

On the other hand, IAA seems to have turned a corner. It was loss-making in FY2015 — with RM685.7 million in pre-tax losses from RM1.46 billion revenue — but is in the black for 9MFY2016 with a cumulative revenue of RM883.2 million and pre-tax profit of RM138.9 million. AirAsia also recently resolved IAA’s negative equity issue by buying up to 3,042 billion rupiah (RM1.01 billion) in nominal value of IAA perpetual securities. This is the second time AirAsia has stepped in to boost IAA’s equity to avoid a suspension by local authorities.

In a regulatory filing this month, AirAsia said the exercise will reduce IAA’s gearing without any need for further capital injection as the subscription “entails a conversion of the amount owed to [AirAsia] into equity of IAA”.

The lure of HKEX may be getting access to a wider base of investors as well as a higher valuation for AirAsia group. Previous reports also suggest that AirAsia is exploring a venture into the China market, which may be boosted by the geographical proximity. “It is known that the airline’s management has felt the company to be unfairly valued,” one source says.

AirAsia Bhd already attracts strong foreign investment interest on Bursa Malaysia. Non-Malaysian shareholders hold  52.8% of its existing shares,   based on Bloomberg data.

However, some analysts believe AirAsia remains undervalued despite rallying over 82% in 2016 alone. The strong rally follows a sharp tumble last year after negative reports on its finances sent prices to as low as 77 sen a share in August 2015, which at the time represented a 70% dip from January 2015.

In a mid-December report, Morgan Stanley Asia states that the market still undervalues AirAsia’s Malaysian operations as well as its aircraft leasing business, Asia Aviation Capital (AAC). AirAsia is currently in the midst of selling some of its interest in AAC.

“In fact, the market was ascribing a higher valuation to Malaysia AirAsia and AAC in 2014 at a lower earnings base,” says the report. “Despite the combined entity’s Ebitdar [earnings before interest, taxes, depreciation, amortisation and rent/restructuring] base being 82% higher than 2014-2015 levels, its enterprise value is still 11% below its 2014 average.” The analysis echoes Fernandes’ opinion in July, when he tweeted that AirAsia’s investments alone are almost worth its market capitalisation.

At the close of Dec 21, AirAsia’s share price was at RM2.35 per share, giving the airline a market capitalisation of about RM6.6 billion, based on Bloomberg data. Its price-earnings ratio stood at 3.1 times.

In comparison, Morgan Stanley’s price target for AirAsia is RM3.82, implying nearly a 63% upside from the Dec 21 closing price. It cited a base valuation of 7.5 times PER based on the historical average valuation of AirAsia’s global peers.