Wednesday, December 2, 2015

Why I bought Airasia and intend to buy more

When I bought this low costs airline at RM1.12, many thought I was crazy. It is  a difficult sector - I agree. Warren Buffett said no, where many American airline companies went bankrupt before. Many Asian airlines went bankrupt as well and needed rescue by their government. Among them Japan Airlines, Thai Airways, Qantas (in trouble) and of course every now and then MAS had that problem and it may not just end.

Why? Because these are national airline companies and (as I have mentioned before), no country would allow their national airlines to be taken off the sky. That was how it was deemed before. Today, many countries still support their national airline, but that thought of supporting the national airline company - at all costs - is being less considered or shall I say is less important.

I would consider having an airline company to a country as like a country having a football team. No country that is able, would not NOT have a national football team - and believe me except for several very strong national teams, for most countries, these are a costly affair. One cannot however say due to this, we should not have a national football team. This is also why the current suspended FIFA president, Sepp Blatter has been in power for 5 terms. He knows what a poor country needs and through FIFA's financial strength, he supports them albeit the many corruption scandals as well.

Back to airline
So when all these countries fight, in a competitive world, most cases there is 1, 2 or at best 3 winners while all the rests would lose - badly. Until 10 years ago, in this region these winners were SIA, to some extent Cathay. The rest were losers that went bankrupt and relived through government rescue. Then came airlines from oil rich countries whom have nothing else to do but to continue throwing oil revenues into their own airlines. These countries supported Emirates, Qatar, Etihad and had seemingly unlimited cash so much so it seems that they are the one until today whom are supporting the Airbus 380 initiative. Without them and originally SIA, A380 would never had gone off the tarmac.

About 20 to 30 years ago, it was also the time where low costs airlines just about were getting traction. First, it was Southwest (in US), in the process killing several full-service airlines in US indirectly. Then of course were Ryanair and Easyjet in Europe. These airlines thrive on deregulation of the air passenger business in their own country (for Southwest) and continent (for Ryanair and Easyjet). If you study, how would an Irish based company (Ryanair) and a Texas based company (Southwest) thrive against competition which are based from higher traffic cities such as New York, Los Angeles, London, Rome, Paris etc? Where they are operated from, these are not the most high traffic places.

These low costs airlines do not follow the usual (past) airline business convention. To be able to compete on price and other means such as efficiency is their business model, with the main intention to carry people point to point - at very affordable price. Prices which were unimaginable, are now possible for mass public to be transported. It is not that we are better off that we are able to fly more often. Our ability to fly is due to there is a big shift in how this sector has changed. Flying should not be a luxury anymore.

Back to Airasia
Where Airasia is operating and competing and driving, it is the same as where Ryanair has been so controversially despised by many of their customers, partners etc. But think about it, they revived many of the smaller or older airports, making commuting easier and faster. Of course, at the same time, making themselves very rich. (Micheal O'Leary, Ryanair's brash CEO is one of the richest person in Ireland). You can also see that Airasia sort of made Malaysia Airport what it is today - that's why Tony Fernandes is furious with KLIA2 and KKIA more recently.

Companies such as Airasia and Ryanair of course changed the landscape of the airline business, pushing hard for deregulation - an area where they will thrive. Of course, Airasia is still fighting hard against MAS in Malaysia, Thai Airways in Thailand, Garuda in Indonesia and many other countries. But their business model is different, so much so that sometimes these airlines do not know how to react - to a low costs competitor. For MAS (where they had done), it cannot afford to compete on prices relying on the operational platform they are in. When it competed on prices, it lost more than RM1 billion in 2014, injuring Airasia as well. In the end, it was MAS whom surrendered first, although Airasia was also badly hurt. Think about it, should it not be a private company that is more seriously hurt competing against a government behemoth?

Ironically from there, Khazanah appointed Christoph Muller. In his resume, he was acclaimed as the turnaround specialist whom made it happened for Aer Lingus, the national Irish airline. He is expected to do the same for MAS.

No article in Malaysia carries his work in Ireland and mentioned whom he was up against. The fact is, he was against Ryanair. He did not really try to compete head-on with Ryanair as I would think he knows he would have lost. As in what we have seen in Malaysia where has been trying to do onto MAS, he made Aer Lingus more agile and smaller - and focus on what a full-service airline would do.

As in most turnaround stories, a person is considered successful if he is able to do complete the turning around, but in most cases, the winner is still your competitor - Ryanair in his case. He did not make Aer Lingus very profitable. Aer Lingus stopped bleeding - and that's success. I am expecting the same to happen in Malaysia. MAS would go smaller, while Airasia will be the one transporting more Malaysians. In Ireland that is the same, so much so that Micheal O'Leary would argue that Ryanair should be the national airline of Ireland rather than Aer Lingus as they transport more Irish than the flag carrier.

Where Airasia has gone regional

We have also seen Airasia is not just a carrier whom are operating off Malaysia. It is going after the regional business, much more difficult but needed. Why?

Flying in most part of Asia, it is not about inter cities within the same country but also between countries. In this sense, Airasia should seek to expand (as it already does) as it does not carry the baggage of a national airline where in Asia especially is a no no for one country's airline to be doing well in other people's country. It is much harder for SIA to propose holding stakes in another country's airline company as compared to Airasia, I would think - although SIA does own stakes in some other Asian countries. For SIA I would think, it is their national duty to bring more traffic into their own country rather than making strategic investments in another country's airline. That is also probably why SIA has offered Tiger Airways shareholders and making the Singapore based low costs airline go private. There must be strategic reasons from this and I am speculating that, the future growth of the business is low costs.

For Airasia, as it is going into many other countries such as Thailand at first, Indonesia, Japan, Philippines, India - it is not without challenges. In each of these countries there are already their incumbent. These are Lion Air, CebuAir, Indigo etc. and they are probably given preference by their own government. This is also why Airasia, as you have seen are facing countless challenges - but these are challenges it must overcome and learn from mistakes.

What investors today is expecting is Airasia to be profitable immediately from these ventures - so much so that there are negative valuations provided for these overseas investments. In actual fact, it should not be. If Airasia's venture is to be valued individually in their respective countries, there would be different value provided added up for Airasia as a group.

The fact is the international investments is pulling Airasia's value down as a whole. Are we saying that Airasia should stop holding stakes beyond Malaysia? Is we say no, that's what today's valuation is however telling us. (as an analyst, we are taught sum of parts - where we break up individual business or investment and value them separately. After that, we will tally them up into one valuation for the group. No analyst has done that for Airasia. If I were to ask to have the exercise differently, just value Airasia's Malaysian operation, what should be the value?)

Today, Airasia is being priced at below RM4 billion - i.e. not even USD1 billion. For the first ever low costs airline in Asia and how much it has done to achieve to where it is today, do you think it is worth less than USD1 billion? Of course, no PE ratio or dividend yield or even NTA would have provided a good valuation threshold. This is because Airasia is continuing to invest in overseas where it will create negative valuation to the group as a whole. People is putting huge value on hope and based on aggressive investments into Amazon and Alibaba (and Lazada, Snapdeal) - all e-commerce - for example but not on hope for a low costs airline business where there is also tremendous growth opportunities as well.

What Airasia needs to do is continue to push and survive during bad times while it grows in times - like now - where low oil price is beneficial for all airlines. If it wins in Asia (that means largest low costs airline in Asia), I am sure it will be a USD10 billion company in 10 or 20 years time - where I see a more open Asian skies.


JiaYeo said...

Hi Felicity, can I clarify although the market cap of Airasia is at RM1bil, but if you include the debts, which as a owner of the business would assume, you are owning Airasia for RM12bil price tag, am i right?

Anonymous said...

What you wrote was very logic and interesting but there were too many assumptions "if" used in your investment idea.

felicity said...

Hi Jia Yeo

You are referring to Enterprise Value. It is a measure when one wants to takeover a company. Airasia's high debt is a matter for consideration but I am happy to see that it is taking measures to reduce that debt although the amount increased in the last quarter (as bulk of its debt are in USD). I am seeing improvement in cashflow from operations and increase in cash.

As for another opinion on too many "ifs", well let's see whether the "if"s becomes true - don't remember I put too many "if"s in my opinion. What I gave is a trend that has been happening in other parts of the world. We are taking that trend, and put it in Asia's perspective. Even as we speak, low costs airlines in those other parts of world are enjoying record profits. I am actually seeing the world to embrace more and more low costs airlines concepts and that is a fact. Not an "if".

Unknown said...

Hi Felicity, surely there are other beaten down Bursa counters that enjoy a better risk/reward payoff than Air Asia.

Anonymous said...

You assume what Ryanair did in Europe to happen with Airasia in Asia. There are too many differences in terms of geo-political and business risk. Having said that, I am not saying Airasia will not do well in future but the assumptions should not be that straight forward. Moreover, Airasia has a complex business structure. I doubt that anyone can fully understand the business by looking into financial reports/analyst reports and forecast the future of the company in 10 -20 years. Value investing is about investing in simple business with consistent growth at a cheap price. Abandoning this rule is not wise particularly giving a high weighting on this stock in a portfolio. Airasia is sexy but ain't simple. Just my 2 cents. :)

felicity said...

Agree on value investing. Hence the rule for Airasia is transporting more people, no frills or less frills. Point to point. Work out the costs that is cheaper than competitor.

It should not be difficult. The revenue growth is consistent. To some because of the currency fluctuation, it is difficult. It is not actually. It is a proven model. Not difficult actually.

Anonymous said...

Not just because of currency fluctuation that makes it difficult to understand. It's a capital intensive and price competitive industry that makes it difficult for investor to make a decision. Airasia is a pioneer in this region and the company enjoy tremendous success because of this reason (of course big part of the success is due to the caliber management). Moving forward, the competition in this region will continue to increase and the management will reinvent the business model from stage to stage to keep up with the competition. The "low cost" competitive advantage will wane moving forward with more entrepreneurs or national carrier in this region competing for a pie.

It's different from some other simple business where you can more or less forecast their future 10 years down the road based on what they did in the past. Furthermore, the price of most asset classes are still moving south and there's no rush to put heavy weighting on Airasia at this point of time.

Anonymous said...

Your investment thesis is pointing "the trend in Europe will repeat in Asia".There are too much assumptions. The trend in west might not happen in Asia. Moreover, the landscape of airline industry is changing continuously, the record profit Western Airlines enjoying now might change few years later. How can you compare what happen in West in the past to repeat in Asia 10 years down the road? If I want to assume, I can assume China's one belt one road will affect how people in Asia travel and affect Airasia's profit, right? It's common that investor try to look at crystal ball too much in making an investment decision.

P.S Cadbury failed badly in US.

felicity said...

Well it is not only Europe that one sees low costs to be successful. It's all over the world. As I have noted, typically in a business where there are some protectionism but you see it opening up such as India or Japan, there will be very little winners but more losers. However the winners tend to win big. Airasia is a calculated bet. As if one is to compare competition among many players in the region which I mentioned, in my theory there will be few winners. Airasia will definitely have tough competition but they will be able to toughen up. As market reach maturity, then one will see usually the largest will win big. I am putting my money on Airasia at the moment. In Malaysia, there are already several of such companies when they reach mature stage, these are winners. Top glove and hartalega in gloves. The telco industry. Nestle in good industry all over the world. Well that's my thought on it.
Also I agree on EV, however it is most of time used during acquisition. If one is look at EV, book value has also taken care of that. Price to BV can also be used. In my article however, I discounted all these valuation as I looked more on business perspective.
I can give an example of business with huge debt but anytime one can just buy because of the cashflow is strong to take care of it. Today PLUS had more than rm30 billion net debt. I think many would put a good acquisition price to it if given the chance to buy. Maxis the same, negative NTA, at its current market cap, people can put a good price. Hence debt is not all bad. In case of Airasia agree that it could do better to reduce the debt level or improve debt to equity. That's also why less people interested, but I actually see them addressing that over last few quarters.
Nice keep it up

GL said...

Felicity...dropping TA to add AA?... as don't think TA is getting anywhere. ..

Bn911 said...

Felicity, how u think of progress for WCE project? Keuro price going down a lot from your buying price.

felicity said...

I think WCE is on track. The last time I checked with them as commodity prices dropped, costs may even be lower despite Ringgit's deterioration.

Unknown said...

Hi Felicity,

Any range of price you are looking at buying more based on current price of RM1.3ish and considering it will not drop to RM1.2x

Schuan said...

its 1.28 already... Are u still holding the same believe?

felicity said...

Yup. At the moment EPF is selling which does not make sense as they are really selling at a loss considering that they bought the shares around RM1.60 - RM1.70 about 8 years ago. Airasia must have ruffled some feathers and I think EPF is just using our money and being careless.

At the moment, some large funds are selling and this is why the stocks is at this price. Not so sure why Wellington selling though.