AmWatch - AirAsia : Finding a floor BUY, 7 Jul 2015

STOCK FOCUS OF THE DAY

AirAsia : Finding a floor  BUY

We maintain BUY on Airasia but trim our fair value to RM2.60/share (from RM2.90/share earlier) to reflect changes to our projections. Beyond this, we attempt to find a floor to valuations as we consider overhanging concerns on the stock that sent it to the current low i.e.:  (1) possible impairment of receivables from associates which raises possibilities of a rights issue; (2) inability to collect future lease revenue from associates; and (3) possibilities of terminating Indonesian and Philippines operations.

On its associate receivables, management is looking at a pre-IPO fund raising of USD100mil each at IAA and AAP on top of an actual IPO within the next two years to recover the amounts due, though there is skepticism on takers of the capital raising at this point. If Airasia is to take impairment on overdue receivables, net gearing could balloon to 3x from 2.3x (FY15F) and NTA fall 25% to RM1.31/share. On the bright side, Airasia has a large asset base to fall back on should it need to reduce leverage and it may not necessarily resort to a rights issue.

In a scenario where IAA and AAP are liquidated, the impact on recurring earnings would come mainly from the absence of lease earnings. We estimate in this scenario, earnings could fall 12%, before taking into account a one-off write off of all receivables due, which would then swing earnings into losses. That said, actual cash profits remains strong at RM1.5bil ex-onetime write-off and depreciation, which renders minimal insolvency risk. Meanwhile, Airasia’s inability to consolidate associate earnings/losses has been argued as not being transparent on its actual performance and creates a loophole for manipulation, although this is debatable. Regardless, in the scenario that it does consolidate all associates’ bottomline (and no lease profits), earnings will fall 32% and our fair value fall to ~RM1.80/share, which still entails reasonable upside from the current levels. In the worst case scenario that Airasia continues to lease out aircraft to associates for “free”, earnings could fall 58% and our fair value could fall to ~RM1.10/share, which would form the floor in our valuation scenario analysis.

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