MARC AFFIRMS ITS RATING OF AA+IS(bg) ON ARAS SEJAGAT SDN BHD’S SUKUK IJARAH PROGRAMME

Feb 14, 2013 -

MARC has affirmed its rating of AA+IS(bg) on Aras Sejagat Sdn Bhd’s (Aras Sejagat) RM500 million Bank Guaranteed Sukuk Ijarah (Sukuk Ijarah) programme with a stable outlook. The affirmed rating solely reflects MARC’s affirmation on the financial institution rating of the guarantor, Kuwait Finance House (Malaysia) Berhad (KFHMB), full details of which are provided in the rating announcement on November 23, 2012.

Aras Sejagat is a wholly-owned subsidiary of AirAsia Berhad (AirAsia) incorporated for the sole purpose of raising financing under the Sukuk Ijarah programme. As a funding vehicle of AirAsia, Aras Sejagat’s standalone debt servicing capacity derives from AirAsia’s ability to make lease payments under the underlying Ijarah transaction. AirAsia’s credit strengths include its market position as a leading low-cost carrier (LCC) in Asia by passenger numbers and fleet size, the airline’s robust load factors, low operating cost structure and solid liquidity profile. Moderating these credit strengths are AirAsia’s continued sensitivity to increasing fuel costs, airport infrastructure constraints, increased competition in the LCC market segment and high debt levels from its aggressive fleet growth strategy.

The largest LCC in Asia by fleet size and passengers carried, AirAsia has developed a substantial network of destinations. The group currently operates a fleet of 118 Airbus A320s, serving 142 routes and covering 70 destinations. AirAsia has demonstrated the ability to implement low-cost business model successfully, through sound management of its capacity and route networks, as well as a consistent focus on maintaining low cost operating structure, and operation of an all Airbus single-type aircraft fleet. AirAsia’s focus on cost conscious travellers, a passenger segment which continues to see good demand growth, and higher demand routes in the region underpins its robust load factor. AirAsia’s load factor was maintained at 79% for the nine months ended September 30, 2012 (9M2012) (2011: 80%), despite the addition of 10 new aircrafts and reintroduction of fuel surcharges. AirAsia mitigates its exposure to sudden and significant increases in jet fuel price through fuel surcharges and hedging. AirAsia reintroduced fuel surcharges in May 2011 to protect its margins. Hedging remains a key tool for the group to mitigate oil price volatility and AirAsia has hedged up to 29% of its future fuel requirements in 4Q2012.

AirAsia will continue to place emphasis on its non-ticket revenues or ancillary income to provide a buffer against the rise in fuel prices, and targets to increase its non-ticket revenue generation. Ancillary revenue accounted for 16% of total revenue for 9M2012 (2011: 18%), but the airline targets to increase the contribution to 25% in the medium term. To enhance its ancillary income, AirAsia established a new income stream in 2012 through its adjacency businesses, which aims to monetise its database and physical assets. This new business structure encompasses joint ventures in business areas related to the airline industry. These include the joint ventures with Expedia, Inc in AAE Travel Pte Ltd which provides travel packages, with CAE Inc in Asian Aviation Centre of Excellence which provides civil aviation training to other airlines and with Tune Money Sdn Bhd for the BIG Loyalty programme.

For 9M2012, revenue increased by 12% year-on-year to RM3.6 billion (9M2011: RM3.2 billion) driven by passenger growth, higher average fare and fuel surcharge for the full nine-month period. Pre-tax profit was RM1.7 billion (9M2011: RM456.4 million) mainly due to the gain on disposal and fair value adjustment of equity interest in Thai AirAsia which amounted to RM1.2 billion. Operating profit was moderated by higher lease expenses from an additional 10 leased aircrafts as reflected in a slight decline in AirAsia’s operating profit margin to 20% (9M2011: 22%). AirAsia’s earnings and profitability are expected to fare better in the last quarter of 2012 given the peak season and higher average fare during the holiday period.

AirAsia’s internal cash flow generation ability remained strong with cash flow from operations of RM852.0 million (2011: RM1.7 billion). Free cash flow was relatively lower at RM311.2 million in 9M2012 (2011: RM1.4 billion) due to higher capital expenditure (capex) spending of RM962.3 million (2011: RM612.4 million) attributed to aircraft deliveries. AirAsia’s debt leverage, as measured by its debt-to-equity ratio of 1.43 times as at end-September 2012, is expected to increase with higher capex on aircraft purchases. As at end-September 2012, long-term capital commitments stood at RM52.1 billion (end-December 2010: RM20.8 billion), which excludes the recent order of 100 new aircrafts. AirAsia’s ability to make the payment of RM420 million outstanding notes is viewed to be strong given its liquidity position; unencumbered cash and cash equivalents stood at RM2.2 billion as at end-September 2012.

Downside risks to noteholders arising from AirAsia’s credit profile are mitigated by the guarantee provided by KFHMB. Any rating action for the Sukuk Ijarah programme will be mainly driven by changes in KFHMB’s credit rating and outlook.

Contacts:

Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my;

Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.