AIRASIA – Fundamental Analysis (19 Apr 2016)

Excel – Download the analysis file

Latest Financial – Q4 2015 Financial Report (26 Feb 2016)

FY15 Q4 Results Highlight:

  • AIRASIA reported FY15 normalised earnings of RM725m, an increase of +74%. This is due to higher than expected capacity growth and load factor.
  • MAA’s operating profit rose 2.5-fold as capacity growth (ASK +5%yoy) was well absorbed, resulting in load factor of 85% which was the highest in 2 calendar years (since: 4QFY13). Meanwhile, both average fares and ancillary revenue per pax rose +4%yoy with the former benefitting from better competitor pricing and the latter from better product offering. On the other side of the coin, cost per unit rose by +4%yoy as higher lease expenses and user charges negated savings from lower jet fuel prices.  (MIDF 29 Feb 2016)
  • PAA’s net losses were reduced substantially by 91% to –US$2.5m as the associate had a better showing on all fronts, i.e. capacity growth, load factor and average fares due to its Boracay (Kalibo) hub benefitting from an influx of Chinese tourists. Management noted that PAA will be next up on the list for recapitalisation pursuing a similar exercise to IAA entailing converting its payables into equity. (MIDF 29 Feb 2016)
  • TAA’s saw its net income drop to US$15m (-32%yoy) as aggressive capacity expansion (+10%yoy) and intense competition led to heavy fare discounting (average fares -18%yoy). Meanwhile, IAA’s losses widened 9-fold to –US79m as it is undergoing right-sizing of its operations to focus on international routes as the price floor for the domestic market (minimum 30% of full service carrier fare) is unconducive. (MIDF 29 Feb 2016)

Valuation:

  • Absolute EY%:
    • EY% (Absolute P/E)
      • Trailing:
        • FY15 (EPS: 0.261) – 2.799 (Uncertainty Risk: MEDIUM)
        • R4Q (EPS: 0.261) – 2.799 (Uncertainty Risk: MEDIUM)
      • Forward:
        • FY16 (EPS: 0.223 ± 5%) – From 2.279 to 2.519 (Uncertainty Risk: MEDIUM to HIGH)
        • FY17 (EPS: 0.253 ± 5%) – From 2.581 to 2.853 (Uncertainty Risk: MEDIUM)
      • EPS applied to reach the current stock price (2.11): 0.197
  • In my opinion, fair value of AIRASIA range from 2.3 to 2.7. Uncertainty risk of fair value is from MEDIUM to HIGH.

Going Forward:

  • Higher risk that IAA’s convertible bonds (CB) may not be successfully issued, as the CBs are now being marketed to foreigners rather than the initial target of local Indonesian investors
  • The continued weakening of the Ringgit against the US$ which is on average 12.7% lower compared to FY14. ~70% of operating expenses and 80% of debt are US$ denominated. AirAsia’s US$ debt hedges are at 73% utilising a combination of natural and derivative hedging. Meanwhile, ~8% of operating costs are hedged to reduce the impact from USD/MYR volatility.
  • AIRASIA is a beneficiary of lower jet fuel prices with lower hedges in FY16 of US$59/bbl (FY15: US$88/bbl)
  • Positives:
    • A persistent appreciation of the Ringgit against the USD (ytd: up +10%) as 65% of AirAsia’s operating expenses and 80% of its debt is USD denominated
    • Lower jet fuel expenses as Airasia has hedged 72% of its FY16 fuel requirements at a lower US$54/bbl (FY15: US$88/bbl) with 28% exposure to the spot market which is hovering around US$48/bbl
    • A sustained recovery of its associates, Indonesia AirAsia and Philippines AirAsia
  • On 1 Apr 2016, the company announced that its founders Tan Sri Tony Fernandes (TSTF) and Datuk Kamarudin Meranun (DKM) have entered into a conditional subscription agreement for 559m new AirAsia shares (representing 16.7% of AirAsia’s enlarged share base) at a price of RM1.84 per share (RM1.80 after adjusting for a  4sen dividend announced on 31/3/2016) to potentially raise RM1b. The subscription of shares will be done via their 50:50 owned entity Tune Live Sdn Bhd (TLSB), raising their shareholding in AirAsia from 18.9% to 32.4% which is just a shy of the 33% trigger in which they would have to make a mandatory general offer. The exercise is subject to shareholder and regulatory approvals.
    • The main reason AirAsia chose to raise equity funding via share placement to its founders despite announcing earlier in the year a US$1b multi-currency bond programme is due to unfavourable terms for the its bonds in light of weak market sentiment.
    • The share  placement  would cause an unwelcomed 15.3% dilution in EPS to existing shareholders. However, shareholders would in return get: 1) a reduction in debt by RM342m which reduces financing costs by RM10.7m; 2) higher equity  and lower debt reduceds net gearing from 2.29x to 1.80x; 3) 65.5% of the proceeds are to fund the company’s expansion (capex, new HQ and working capital). Meanwhile, the placement at its market price could be seen as a vote of confidence by its founders in the company’s prospects.
  • I am still worry about AIRASIA, but I believe AIRASIA will be able to go through these issues.

At the time of writing, I owned shares of AIRASIA.

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