AirAsia takes multi-stop route to capital-raising

June 18, 2015

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

AirAsia is taking a multi-stop route to capital-raising. Concerns over debt and accounting have hammered shares in the region’s largest budget carrier. Boss Tony Fernandes says the company doesn’t need a rights issue and can recoup cash from overseas offshoots. But this requires investors to put fresh capital into loss-making affiliates. That’s not an easy sell.

Debt of 11.5 billion ringgit ($3.1 billion) is already uncomfortably high for an outfit expected to make 1.9 billion ringgit in EBITDA this year. AirAsia’s part-owned sister airlines, especially in Indonesia and the Philippines, owe it increasing sums: amounts due from associates were nearly 2.5 billion ringgit at the end of 2014.

The gloomy case, as made by Hong Kong’s GMT Research, is that this cannot last. AirAsia is booking profits from affiliates that it cannot collect. While restrictions on foreign ownership mean it is only a minority shareholder, it effectively controls these airlines and should consolidate their accounts. Facing up to reality would force a big equity issue.

AirAsia counters that its accounts are transparent, debt is coming down, and cheap fuel and reduced competition should make for a “very good year”. Selling and leasing back planes will help cut debt. It’s also planning to publish pro-forma consolidated accounts.

Fernandes says local partners in Indonesia and the Philippines will each inject over $80 million of fresh equity, and both units will sell $100 million-plus of convertible bonds, before floating in 2017. Some of this will be used to pay back sums owed to the parent.

Well, perhaps. But new investors in the affiliates will need to be comfortable with much of their cash going to repay debts, while also believing in a bright future for these units. As HSBC analysts note, both are sub-scale and face powerful local rivals in Lion Air and Cebu Air.

Despite a near-6 percent bounce by late morning on June 18, AirAsia stock is down 40 percent this year. A multiple of 5.8 times forecast 2017 earnings – 31 percent below peers – suggests investors are unconvinced that AirAsia will be back on track by then. Maybe that’s an over-reaction. If not, either earnings estimates are too high, or dilution is still a big risk.

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