KUALA LUMPUR: Alliance DBS Research has downgraded AirAsia to fully valued with a target price of RM1.05 after it proposed to convert its debt from Indonesia AirAsia (IAA) into perpetual securities.
The research house said on Friday this corporate exercise will not take IAA to positive equity while third party investors’ participation remains crucial
It said the key question is whether IAA can eventually turn around.
To recap, AirAsia converted 2.1 billion rupiah (RM621.5mil) of the 4.3 bil (RM1,292.4mil) due from IAA to perpetual capital securities in the latter. The capital securities carry a deferrable coupon rate of 12% per annnum, and are redeemable at 101% of the nominal amount.
This transaction is aimed to help IAA attain a positive equity position, as directed by the Indonesian Directorate General of Civil Aviation. Post-transaction, AirAsia will immediately recognise a RM474.2mil loss representing its share of unrecognised prior year losses in IAA.
Alliance DBS Research explained that the conversion would not take IAA to a positive equity position, as its negative equity was 4.2 bil rupiah as at end-2Q15. Thus, third party subscription to the balance 51% of IAA’s perpetual securities (which is uncertain) is crucial for IAA to remedy its negative equity position.
Also, failure to attract third party investors into IAA would mean AirAsia will have to continue funding the former, a drag on AirAsia’s cash flow which may ultimately result in a cash call.
“The million-dollar question remains whether IAA can eventually turnaround. Unfortunately, IAA is facing strong headwinds in the near term, given the rupiah’s depreciation vs the US dollar, and the competitive environment in Indonesia.
“If IAA continues to be loss-making, AirAsia may have to make further impairment on its investment in IAA including receivables.
“Our RM1.05 TP (1.3 times FY16F adjusted book value per share) is unchanged, as it has accounted for the prior year losses in IAA. But, we downgrade AirAsia to Fully Valued, as the recent rally as unjustified in our view, given the risks in IAA,” it said.