Light at the end of the tunnel for Capital A

CEO announces plan for company to exit pn17 status

“The merger is to streamline the operation which aims to be the largest low-cost carrier in Asia with the ‘One Airline’ strategy set to transform the face of global low-cost travel.” Tan Sri Tony Fernandes

KUALA LUMPUR: Shareholders of Capital A Bhd will be relieved that there is light at the end of the tunnel after two years holding shares in a Practice Note 17 (PN17) company.

Capital A chief executive officer Tan Sri Tony Fernandes finally revealed its restructuring plans to exit the PN17 status yesterday after a build up of several announcements over a couple of days prior to this, including his extension of leadership at the group while providing an advisory role for its aviation business.

By September, Capital A shareholders will hold shares in the group’s four aviation-focused core businesses as well as maintaining a direct ownership in the combined aviation businesses, under a new company, Airasia Group Sdn Bhd (AAG), which will assume the listing of Airasia X Bhd.

Capital A’s main businesses will comprise Capital A Aviation Services, Teleport, Move Digital, and Capital A International (CAPI).

“The merger is to streamline the operation which aims to be the largest low-cost carrier in Asia with the ‘One Airline’ strategy set to transform the face of global lowcost travel,” Fernandes said at the signing ceremony of a conditional share sale and purchase agreement between Capital A and AAG yesterday.

“We are working on the regularisation plan, which is much simpler now because we don’t need to do the special purpose acquisition company (SPAC) as a condition for exiting PN17. We are equity positive and all our business groups are profitable,” he adds.

Capital A had previously proposed listing its intellectual property segment, the Airasia branding, on Nasdaq via a SPAC.

However, Fernandes says it is still considering spinning off its branding business given the tremendous interest shown by American investors.

“There is tremendous [interest in CAPI], and the bankers are now saying there is an appetite for new capital to come in. We are actually effectively out of PN17 now, and we are only going to get a stronger balance sheet.

“So, we don’t have to do Capital A International’s SPAC, but looking at the interest, looking at building our brand outside, in an American market, and giving Americans a flavour, I think it’s well worth doing,” he adds.

Meanwhile, on its new company, Fernandes expects AAG to be listed on Bursa Malaysia in September with the valuations to be determined later.

“Ultimately, it will be up to the market to decide on the valuation. We are going to help the market by giving our profit guidance as well. Our numbers in Airasia Group will be easier to understand now because it will be purely aviation.

“We have done a lot of work simplifying the numbers. All our companies (airline business) are consolidated now. It will have no associate accounting,” Fernandes explains.

Capital A announced on April 25 plans to sell Airasia Aviation Group Ltd (AAAGL), consisting of Airasia subsidiaries in Thailand, Indonesia, the Philippines and Cambodia to AAG under a deal worth Rm6.8bil, which is more than double the current market capitalisation of Capital A itself.

Pending the acquisitions, the new company will issue free warrants on the basis of one warrant for every two new-company shares held with an exercise price to be determined later, before it undertakes a Rm1bil private placement.

The bulk of the placement proceeds amounting to Rm954.5mil, will be used to fund the new company’s newly consolidated aviation business, comprising Rm450mil to Rm550mil for aircraft funding, Rm300mil for repayment of Airsia Bhd’s borrowings, and Rm104.5mil to RM204.5 mil for working capital.

Fernandes says, “Turning Capital A’s shareholders’ equity positive, which is a major step forward in exiting PN17, is a welcome benefit but ultimately immaterial in our decision to pursue this proposed divestment.

“The puzzle of bringing together all Airasia airlines under a single umbrella had been on our minds for many years and the missing piece has finally arrived in the form of the new-generation Airbus aircraft.”

He adds that with its new A321 fleets, the airline could focus on new markets, which it could not do previously with its A330 fleets.

“Smaller aircraft will enable higher utilisation and faster turnaround time. The ability to lower trip costs will be around 45% to 50% in terms of savings. The variable costs, such as fuel, will be reduced by half. This will dramatically change our profit and loss.” Fernandes says.

He adds that with the new fleet, Airasia can create a fly thru hub as huge as Dubai and Doha, in Kuala Lumpur and Bangkok.

Analysts are generally positive on the restructuring exercise as this will put the company in a much stronger position by strengthening its business model.

Hong Leong Investment Bank Research (HLIB Research) says: “We are overall positive on the exercise mainly on the streamlining of the aviation segments to be consolidated under AAG, in strengthening the business model for long haul–short haul integration, with a new medium-haul segment as the intermediary, by leveraging the new A321 fleets.”

Under the restructuring plan, HLIB Research projects that Capital A’s equity position could rebound to a minimum of Rm492.8mil, with no conversion of outstanding redeemable convertible unsecured Islamic debt securities (RCUIDS) and warrants, or a maximum of Rm1.6bil if the outstanding RCUIDS and warrants are fully converted, enabling it to leave the PN17 status.

HLIB Research maintains its “buy” call on Capital A with a higher target price of RM1.68, from RM1.40 previously, as it sees the group continuing to recover, leveraging the improving air travel outlook in the region.

Similarly, TA Research is also positive on the deal as the consolidation plan would create synergistic benefits for AAG as the Malaysian and Thailand segments can tap into AAX’S presence in China, Japan, South Korea and Australia.

“From the minority shareholders’ standpoint, it would be win-win for all shareholders as Capital A shares can be lifted from the PN17 status and AAX shareholders will get the free warrants,” the research house adds.