AirAsia Bhd’s plan to place a private placement of 20%

PETALING JAYA: Analysts have responded positively to AirAsia Bhd’s plan to place a private placement of 20% of its share capital to raise about RM500mil, saying the move would “substantially enhance” AirAsia’s ability to restructure its finances while earnings dilution would be minimal.

The airline recently proposed a private placement of new shares amounting to 20% of its existing paid-up share capital or 475 million shares, with the aim to reduce debts and have more cash.

Affin Investment Bank said it has turned “sanguine” on AirAsia following the announcement of the private placement plan, in addition to the budget airline’s decision to defer delivery of eight aircraft in 2010 and seven in 2011 to 2014.

“We were previously concerned over AirAsia’s increasingly stretched balance sheet in lieu of its aggressive fleet expansion as well as steep earnings dilution arising from a potential cash call,” the brokerage said.

Based on AirAsia’s closing price on Thursday at RM1.48 and an estimated RM500mil to be raised, the research house calculated that some 338 million new shares would be issued.

“This represents 13% of the enlarged share base of 2.7 billion. Together with the guidance that the placement price will be close to prevailing market price, we thus believe that the potential earnings dilution will be minimal,” it said.

Affin Investment also said the lower capital expenditure (capex) requirements in tandem with the deferment in aircraft delivery addresses its concerns over AirAsia’s future funding commitments, and estimated that its net gearing position would fall to 2.6 times from 3.7 times in first quarter.

The budget airline’s capex has been reduced to RM4.5bil over fiscal year 2010 (FY10) to FY11 from RM6.8bil based on initial aircraft delivery schedule.

Affin also lifted its core earnings forecast by 6%-7% for AirAsia, projecting that the airline would make RM545.5mil in fiscal year 2010 and RM591.7mil in 2011.

However, after accounting for an enlarged share base in FY10, the budget airline’s earnings per share (EPS) would decline 7%, the brokerage said.

Affin has lifted its recommendation on AirAsia to “trading buy” from “reduce” with the target price raised to RM1.81 from RM1.10 previously.

TA Securities said the private placement would substantially enhance AirAsia’s ability to restructure its finances.

“Gearing ratio would decline to 2.7 times from 3.7 times,” it said in a note to clients recently, noting that a high gearing level was a key investment concern on the stock.

The brokerage adjusted upwards AirAsia’s earnings estimates by 10.9% to RM574.8mil in fiscal year 2009 and by 45.3% to RM758.5mil in 2010.

TA has maintained its “buy” call on the stock with a target price of RM2.20.

The brokerage said it estimated AirAsia’s private placement would raise gross proceeds of about RM487mil, with the proceeds to be allocated for working capital purposes only.

“The group is more likely to allocate 10% to institutional investors, while the balance will be allocated to existing shareholders,” analysts with the brokerage said.

ECM Libra Investment noted that AirAsia’s shares have surged 27.5% in just two weeks, saying it did not expect its trading target price of RM1.50 to be achieved so fast.

The brokerage recommended a “buy” call on AirAsia with a 12-month target price of RM1.90.

“If AirAsia can break above its major resistance at RM1.70, it will likely head towards the RM2.00 region soon,” ECM Libra said in a research note.

The counter was heavily traded yesterday to close two sen higher, or 1.3% at RM1.50, with 15.7 million shares changing hands.