Challenging road out of PN17 status
? Maintain Reduce with a lower TP of 9 sen as we revise our RNAV calculation.
? We reiterate our view that it is not apparent how AAGB will be able to uplift itself from PN17 status without significant equity capital raising.
Max RM7.4bn boost to shareholders’ funds needed for PN17 uplift
AAGB was classified as a Practice Note 17 (PN17) listed issuer from 7 Jan 2021, and we explored some of the ways that AAGB can exit its PN17 status without raising new equity in our 17 Jan note. This report adds more colour to the earlier analysis. Since AAGB’s auditor had expressed material uncertainty related to going concern in its audit report for the FY20 accounts, AAGB will need to have shareholders’ equity of at least 50% of its paid-up share capital (or at least RM40m without the ‘material uncertainty’). With paid-up share capital of RM8.5bn as at 30 Sep 2021, this means that AAGB will need a minimum shareholders’ equity of RM4.2bn. By contrast, AAGB had a negative shareholders’ funds position of RM3.2bn as at 30 Sep 2021; hence, in order to be uplifted from PN17, AAGB will need a RM7.4bn boost to its shareholders’ funds on a proforma basis. The gap is a moving target; while RM197m (20%) of the RM975m RCUIDS has been converted into new ordinary shares, ongoing business losses will almost certainly widen the gap.
Capital reduction can reduce but not eliminate the yawning gap
One of AAGB’s options to reduce the gap, which we had not mentioned in our 17 Jan note, is for AAGB to obtain shareholders’ and court approval for a capital reduction. This means that RM5.8bn of retained losses (as at 30 Sep 2021) can be offset against paid-up share capital of RM8.5bn, leaving a residual paid-up share capital of RM2.7bn. In this way, AAGB will need to have shareholders’ funds of at least RM1.35bn, or ‘only’ a RM4.55bn boost as at 30 Sep 2021 (RM1.35bn add RM3.2bn) to exit PN17 status. We noted in our 17 Jan report that AAGB may consider the deconsolidation of IAA/PAA to reduce the gap by RM2.25bn; but this may only be possible if IAA/PAA both secure new shareholders, upon which AAGB can convince its auditor that it only has significant influence, but not control, over IAA/PAA. Without this, AAGB may not be able to secure its auditor’s approval to deconsolidate. Separately, even though AAGB is working to reduce its aircraft leasing rates, the lease liabilities on its balance sheet may not actually fall because of the extension of the leases by 3/6 years, and because its auditor may apply a lower discount rate to present-value the future lease liabilities.
Revaluation gains on digital companies possible, but not assured
This means that even with a potential capital reduction, AAGB may struggle to uplift its PN17 status with a huge RM4.55bn gap in shareholders’ funds. The RM650m warrants and RM778m in remaining RCUIDS may not be converted into shares soon with the share price below conversion prices. AAGB may have to sell down stakes in its various digital businesses to below 50% in order to benefit from fair value revaluation gains, but it is difficult to predict if/when this may happen. De-rating catalyst: a new airline in Malaysia could depress yields. Upside risk: travel recovery once the Omicron wave passes.