Crystallisation of value
● The sale of leasing arm AAC is looking more likely. Details over recent weeks suggest scope for the value in AIRA's planes to be crystallised at a level higher than we previously expected, substantial deleveraging, and a large special dividend.
● Assuming the sale of AAC completes by end-2016, we estimate AIRA's net D/E would drop to -0.44x from 1.64x. Current net debt of RM9.2 bn could turn to RM3.8 bn of net cash. On a proforma basis, excluding AAC our earnings estimates would be ~34-43% lower.
● Post AAC-sale and placement, AIRA could have ~RM3.1 bn of excess cash (39% of market cap) to fund a special dividend. Whilst MH pricing pressure has picked up, we think there is still
potential for some upside surprise in 2H16 earnings.
● We change our valuation methodology to incorporate the AAC divestment, though our forecasts still do not assume the same due to timing uncertainty. Our target price increases to RM3.80 (from RM3); rating raised to OUTPERFORM from Neutral.
Upgrade to OUTPERFORM, TP raised to RM3.80
The sale of leasing arm AAC is looking more likely. Along with additional details given in the 2Q16 results, there is now scope for the value embedded in AIRA's owned planes to be crystallised at a level ~13% higher than we previously expected, substantial deleveraging, and a large special dividend. We also raise our 2017 EPS forecast by 16% after correcting our fuel hedging assumptions.
Cash-rich, low leverage, up-cycle
Assuming the sale of AAC and the ongoing placement to founders are completed by end-2016, we estimate AIRA's net D/E would drop to -0.44x from 1.64x (current net debt of RM9.2 bn could turn into RM3.8bn of net cash). On a proforma basis, excluding AAC our earnings estimates would be ~34-43% lower. Cyclical upturns don’t last forever, e core airline business could see tailwinds from low oil and relatively benign competition for a few more quarters.
Strong 2H16, special dividends
Whilst Malaysia Airlines' pricing pressure has picked up, AIRA's forward bookings are pointing to record load factor in 2H16; we think there is potential for some upside surprise (our 2016E forecast is 15% higher than consensus). Post AAC-sale and placement, AIRA could have ~RM3.1 bn of excess cash (39% of market cap) to fund a special dividend, in our view; coincidentally, such a dividend would mean the founders would have raised their stake to 32% from 19% for free.
RM3.80 TP assumes AAC sale
We change our methodology to incorporate the AAC divestment; our SOTP comprises the potential excess cash post AAC-sale, the remaining pure airline business, and AIRA's stakes in listed associates (zero worth for IAA and PAA). The potential valuation for AAC also implies an RNAV of ~RM3.55/share. Due to timing uncertainties, financial estimates in the databox do not yet assume the AAC divestment; we include some proforma estimates in the note.
by Credit Susse – 21/09/2016
