Australia's Rex aims to raise A$35m from IPO

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Australia’s largest regional airline, Regional Express (Rex), has issued a prospectus for its initial public offering (IPO) which aims to raise A$35 million ($27 million) through the issuance of new shares and which values the airline at A$115 million.

Rex expects to list on the Australian stock exchange on 9 November after its share offer closes on 28 October, the carrier says in its prospectus, which outlines plans to issue 35 million new shares at A$1 each, increasing the total number of shares to 115 million.

The airline’s existing shareholders will see their combined stake decrease to 69.6%, says Rex. Some of the major owners include: a Canberra-based consortium of investors, Canberra Air, with 9.4 million shares; Lim Kim Lark, with 11.9 million shares; Seah Kerk Chuan, with 10.4 million shares; and the airline’s Singapore-based chairman, Lim Kim Haim, with 7.5 million shares.

Rex says major shareholders have agreed to refrain from selling their shares for one year after the market listing and that the carrier plans to issue dividends after fiscal 2005/06.

It expects to generate an 8.4% increase in revenue for the 12 months to 30 June 2006 and record a pre-tax profit rise of 57%, to A$21.5 million from A$13.5 million. In 2004/05 the airline had a net profit of A$11.3 million.

Rex says funds from the share offer, estimated at A$32.3 million after expenses, will be used for various purposes such as spending A$1.16 million to buy from HZL Limited of Australia “a large stock of spares including two aircraft engines”. HZL is the administrator of Kendell Airlines and Hazelton Airlines, the two regional airlines that the current owners bought from administrators in early 2002 and merged to create Rex.

An undisclosed sum will be retained as “working capital” and to “strengthen its balance sheet so it can take advantage of domestic and/or overseas investment opportunities if and when they arise”.

There is also A$12 million which will be used to buy a 50% stake in Sydney-headquartered regional airfreight operator Pel-Air.

“Rex freighter and charter [FC] and the shareholders of Pel-Air have also entered into a put and call option deed whereby Rex FC has the right to acquire the remaining 50% of the shares over a 24 month period” for A$12 million, says Rex.

Other major items of future spending include using A$2.1 million to buy a Saab 340B - from Salenia Transport of Sweden - which will be delivered on 18 November 2005.

It also plans to spend A$650,000 to pay the balance owed on two Saab 340As and A$4.6 million to help pay for the airline’s three existing Saab 340Bs.

“The purchase of more aircraft” will allow Rex “to reduce aircraft leasing charges” and boost revenue by “increasing frequency on existing routes and serving new routes”.

It adds: “The company has budgeted for a 9.2% increase in capacity…and corresponding 9.4% increase in passengers…for the current financial year in the form of increased frequency and upgrades to Saabs from [19-seat Fairchild] Metros.”

Rex also expects to generate more revenue in future from freight and charters even though in the 12 months to 30 June 2005 these two segments each only accounted for 0.6% of total revenue.

“The potential for more charter revenue is significant as Rex has had to turn away a large number of charter requests due to unavailability of aircraft,” it says. “For this reason the company intends to purchase an additional aircraft in November 2005” which will be used as a back-up and for charter work.

Rex also sees potential to boost freight revenues which is why it is “taking a strategic investment in a well-established air freight company Pel-Air”.

It says buying a 50% stake in Pel-Air will contribute to profits and will allow Rex “to position itself in this important sector” and “capitalise on potential operational, commercial and administrative synergies”. Pel-Air started operating in 1984 and now has several different aircraft types, mostly IAI Westwinds and Fairchild Metros.

As for its own aircraft fleet, Rex claims it makes more sense to buy rather than lease Saab turboprops because the cost of buying “is currently equal to 2-4 years of lease payments depending on the age of the aircraft”.

During the 12 months to 30 June 2005 the carrier transported around 1.1 million passengers on 35 routes from it main hubs in Sydney, Adelaide and Melbourne using its five Metro 23s and 24 Saab 340s, seven of which are A-models and 17 B-models.

Rex says the Saabs have “an economic life of between 11-16 years”, adding that “given the time remaining the company feels it is not productive to speculate on the type of aircraft that would” be needed in future to replace them.