AIRASIA – Fundamental Analysis (28 Jun 2016)

Excel – Download the analysis file

Latest Financial – Q1 2016 Financial Report (26 May 2016)

FY16 Q1 Results Highlight:

  • 1QFY16 revenue jumped 31.0% yoy to RM1.7bn on stronger pax traffics (RPK: +26.2% yoy), overall yield improvements (1.4% yoy), higher ancillary income/pax (+11.1% yoy) as well as new revenue recognition of maintenance fee charges to JVs/Associates. (Hong Leong 27 May 2016)
  • Margins improved significantly in 1Q16 mainly due to lower jet fuel costs at US$56/bbl (vs. US$75/bbl in 4Q15 and US$85/bbl in 1Q15). AirAsia has hedged 76% of jet fuel requirement for the remaining FY16 at US$54/bbl and 25% of 1H17 at US $58/bbl. Hence, AirAsia’s strong margins is expected to be sustainable. (Hong Leong 27 May 2016)
  • TAA (Thailand) also cont ributed strongly at RM94.9m in 1Q16 (+225.8% yoy; +226.1% qoq) on the back of strong demand on China sector as well as low jet fuel costs. (Hong Leong 27 May 2016)
  • Outlook on the turnaround of IAA (Indonesia) and PAA (Philippines) seemed promising, after both registered lower operating losses of RM34.6m (-52.8% yoy) and RM32.6m (-54.6% yoy) respectively. The ongoing restructuring effort of IAA (capacity cut & focus on profitable routes) and PAA (fleet restructuring & focus on North Asia sector) continue to improve the load factors, yields and cost structures. The capital restructuring of both entities (new fund injections from other shareholders) are expected to complete by 3Q16. (Hong Leong 27 May 2016)
  • JAA (Japan) is expected to commence operation by Oct 2016 with 2 A320s. AAI (India) continued to improve with lower operating losses (-55.6% yoy) as it expanded further. (Hong Leong 27 May 2016)

Valuation:

  • In my opinion, fair value of AIRASIA range from 2.5 to 2.6. Uncertainty risk of fair value is 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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