AirAsia & AirAsia X Finally Come Together

 

The acquisition of Capital A's aviation business by AirAsia X (AAX) will be completed soon.

AirAsia is undoubtedly a well-known aviation brand which makes Malaysian proud. After the acquisition is completed, is AAX at current share price of RM1.60+ undervalued or overvalued?

To recap, AAX will acquire AirAsia Aviation Group Limited (AAAGL) & AirAsia Berhad (AAB) from Capital A for RM3bil & RM3.8bil respectively.

AAAGL provides air transport service from the Philippines, Thailand, Indonesia & Cambodia, while AAB provides air transport service from Malaysia.

AAX itself provides medium to long-haul air transport service from Malaysia & Thailand.

After this corporate exercise, AAX will become an attractive aviation group housing all AirAsia short, medium & long haul air travels.

However, AAX currently has a net current liabilities. How can it afford to swallow 2 companies valued at RM7.8bil combined?

Firstly, the purchase of AAB (RM3.8bil) will be satisfied entirely via debt settlement, which means AAX will "inherit" the total borrowings and lease liabilities of AAB amounting to RM16.4bil, and shareholders deficit of RM1.8bil as at Jun24. 

Meanwhile, the purchase of AAAGL will be satisfied entirely via issuance of 2.307 billion of new AAX shares at an issue price of RM1.30 each.

AAAGL also comes with shareholders' deficit of RM4.5bil and total debts of RM9.6bil as at Jun24.

So, AAX doesn't need to pay cash to acquire both AAB & AAAGL, and those accumulated lost will be eliminated later through share capital reduction exercise.

As mentioned earlier, AAX has net current liabilities and it needs more cash to operate all its subsidiaries.

To do so, there will be issuance of free warrants on the basis of 1 warrant for every 2 AAX shares.

There are 447mil AAX shares now, so 223.5mil warrants will be issued.

Next, there will be a private placement of RM1bil, with issue price at least RM1.00 per share and maximum 15% discount from 5-day VWAP of its latest share price.

If the private placement is to be done when AAX is traded at RM1.60, the minimum issue price will be RM1.36, and total shares issued will be 735mil.

After everything is completed, AAX will have total outstanding shares of [447 + 2307 + 735] mil = 3.49 billion shares, and 223.5mil warrants.

Besides, AAX has granted Garynma (Singapore based investment company) rights to subscribe up to 12% of the total issued shares immediately after the completion of the acquisition.

Garynma has 48 months to exercise the subscription option. If all the option shares are exercised, total issued shares of AAX will increase to 3.9 billion shares, excluding conversion of warrants.

Now we roughly know how many shares AAX will have after the corporate exercise, how about its earnings?

AirAsia's net profit is extremely hard to predict. It tends to swing wildly affected by forex gain/loss, fuel price, derivatives gain/loss, one-off depreciation charges etc.

For AAX's Malaysia operation, at least it is making profits in previous FY24. 

In FY24, AAX 's net operating profit before tax & forex gain was RM204.7mil. Its profit after tax stood at RM207mil, with only RM29.8mil of forex gain.

In FY24, it has good operating cash flow of RM395mil and RM102mil net increase in cash.

In the first half of FY25, its net operating profit was lower at RM44.4mil (excluding the forex gain of RM41.3mil), compared to RM113.2mil in the corresponding period of FY24.

Year end will be the best quarter for AirAsia so I assume that for the whole FY25, AAX might generate profit after tax (excluding forex gain/loss) of at least RM100mil.

How about the profit contribution from AAB & AAAGL?

Below are the aviation segment results of Capital A in FY25Q1 & FY25Q2. I'm not too sure whether I should read the "Aviation" column or the "Discontinued Operations" column. 

I'll just use the figures from "Aviation" column.

In the first 2 quarters of FY25, the aviation business of Capital A generated RM240.7mil + RM195.9mil = RM436.6mil of net operating profit without including the depreciation & interest expense of non-operating aircraft and forex gain.

The forex gain was huge at RM906mil in 2 quarters. The depreciation & interest expense of non-operating aircraft (total RM321.7mil in 2 quarters) are likely to continue for quite some time, even though they are considered as "infrequent".

Without the forex gain, its operating profit will drop to RM114.9mil, if the loss from non-operating aircraft depreciation and interest expense are included. 

If all those infrequent & one-off items are included, its profit before tax will be (RM161.6mil + RM862.1mil = RM1.02bil) in the first 2 quarters of FY25.

Since those are non-cash items, I will use its net operating profit (RM436.6mil in the first half of FY25) to guesstimate its core net profit, which might be around RM1.0bil for the whole FY25.

In term of cash flow, the aviation business of Capital A generated RM2,634mil of strong operating cash flow in the first half of FY25. Its financing cash outflow was RM2,094mil and investing cash outflow was RM52.8mil. 

Overall, it's a decent RM487mil of positive cash flow.

If we add up AAX, AAB & AAAGL's potential core net profit in one year, it will be around RM1.1bil.

Lets assume Garynma exercises 4% option shares immediately and there is no conversion of warrants, total issued shares of AAX will reach 3.63bil.

Using these figures, the new AAX's potential EPS will be 30sen. A simple PE ratio of 10x means its share price should be RM3.00 after the corporate exercises.

Public investment bank is giving it a target price of RM2.47.

Currently AAX's share price is RM1.63, is it undervalued? 

Anyway, those calculations above are apparently oversimplified. The market might not see it this way to decide the fair share price for AAX.

Don't forget that after the acquisition and private placement, AAX will still be laden with debts.

However, AirAsia seems to be in a good position to post better financial results in the near future.

The Brent crude oil price is at relatively low level of USD63/barrel, MYR is going stronger at RM4.13 and next year 2026 is Visit Malaysia Year.

AirAsia continues to add new routes and more aircrafts will be reactivated sooner or later, thus reducing the depreciation and interest expense for non-operating aircraft.

Both AAX & Capital A will announce their FY25Q3 results very soon. 

Investors might want to include the new numbers to get a better picture of AirAsia's latest business performance.