Monday, January 18, 2016

Some answers on Airasia

I have some comments from a reader which I will try to answer:

felicity, I benefited from reading your blog articles, so here's my take on AirAsia.

1. Look at their free cash flow
Taking a long-term perspective, return to shareholders is simply discounted sum of free cash flow. Profit is an opinion, cash is real.

I have been a proponent of free cashflow in my blog and did I change my strategy and investment methods. No. It is accurate that Airasia has not been strong in its cashflow department over the last few years but if one is to read further, Airasia has been on growth path before and they have actually slowed down their growth since 2015. For 2015, one will see a net free cashflow of more than RM1 billion and that is before they have started to fully enjoy the much lower fuel price. Most airlines (except for many American airlines) had yet to enjoy the lower fuel costs. 2016 will be year where the lower fuel will start to provide the additional profits. Airasia's business generates real cash.

2. AirAsia has over $11B ringgit in debt. 
Sure, they have plenty of planes. But planes can't be sold otherwise, they would have to close shop. Even if they reduce their planes, they probably won't get a good price (see point 3).

Debt is definitely high. They have to work on it before it becomes overly burdensome. However, they are not in the business of selling planes but seats. Most tend to think what if it closes down. It is a business. They do sell old planes and buy new ones. On that part the narrow body planes are much better situation than wide body planes. Example A380 or B777 will have problem to be sold, not so A320.

3. There is a overcapacity in the airlines industry currently (as MAS's new CEO pointed out during a recent interview).

Wonder why you think AirAsia should be worth US$10B someday? Did you do a discounted free cash flow analysis or just compared them to valuations of other budget carriers?

I am the bullish one of course and most analysts provide a higher valuation than its current price. I myself think it should be higher, but of course its my opinion. Analysts tend to take the safe way out as by putting a much higher price, they are taking risk of being considered irrational. I can be irrational. If I think Airasia is worth $2 billion then for it to reach $10 billion is a multiple of 5x. I also do not think dollar will be 4.3x RM in the long run, hence valuation of say RM35billion does not sound too expensive anymore. But of course, many would think I am crazy as Airasia is only priced at RM3.7 billion today. That's 10-20 years down the road. If one is to look at the trajectory of successful and top low costs carrier, Ryanair, Easyjet and Southwest, they have that kind of trajectory over 15 years especially during growth to maturity period.

Today LCC are competitive (even have RayaniAir - hmmm sounds like RyanAir isn't it) but small ones will fizzle out. I am always the proponent of full fledged low costs - not the Singapore model such as Tiger and Scoot where they are owned by SIA. It is hard to have 2 models unless they are independent. I also like the management of Airasia (many will not agree with me) as they are positioned to be successful and grow. Some of the LCCs are positioned to be "jaguh kampung". Airasia is not although they do face huge challenges as we see it when moving overseas. Thailand though is one success story.

I however think SIA's subsidiaries like Tiger will give Airasia a run for their money overtime as SIA is a bigger parent than Airasia has. (Singapore by the country is also more focus, unlike Malaysia whom is trying to kill Airasia and in the process, affecting its own tourism business. I hope overtime they will realise that a strong LCC would bring benefit to the country especially when forex is important to Malaysia) 

Also note that as it is Tiger being valued more than SGD1 billion is a sign than a struggling low costs such as Tiger is worth something and not as per what Airasia is valued at today. Check news on SIA's offer for Tiger!

On having a DCF, it is preposterous as DCF model can be out of whack easily. Nobody can predict the cashflow future correctly. These are meant for financial people whom only uses excel well.

On overcapacity, its real and the one who blink first is MAS, right? Them cutting capacity brought some benefits to Airasia and other airlines like Emirates. The data is already been provided by Malaysia Airport whom reports on traffic monthly. The traffic since MAS had its cut brought traffic to KLIA2 significantly. Airasia is by far the biggest user of KLIA2.

In the long run, both LCC and full fledged will see competitions but the next decade will be decade for LCC than the one MAS, Emirates are focusing on. SIA (and I trust the data crunching from Singapore) has already foreseen that. I am seeing also that Airasia is in right position and will be there to ride the wave, But it has to be diligent and careful.

Just look at the trend as seen below.


Thursday, January 14, 2016

Airasia will not move upward until all Wellington and EPF's holdings are sold?

There is no doubt that both EPF and Wellington, the 2 larger shareholders are selling their stakes almost on a daily basis, for whatever reasons which I am not aware of.

Wellington is a large fund manager based in Boston while everyone in Malaysia knows EPF. Besides the founders i.e. Tune Air, these are the 2 largest shareholders of Airasia. The selling by these 2 definitely have impact on the share price of Airasia as it dropped from more than RM2.30 to as low as RM0.77 in a span of less than 3 quarters.

As below are the holdings of Wellington where it has dropped from 12.901% in 30 June 2015 to 7.845% in 31 December 2015 - 5.056% drop.

Wellington's holdings as at 30 June 2015 (12.901%)

Wellington's holdings dropped to 7.845% in 31 Dec 2015

Holdings of EPF between the same period 30 June to 31 Dec 2015: dropped from 7.991% to 5.797% - reduction of 2.194%

Closing as at 30 June 2015 - total 7.991%

As at 31 Dec 2015 - 5.797%

From the observation, it seems that the selling is not tapering off and as mentioned Airasia has dropped substantially as per below chart.

Airasia's share price over last 1 year

Another observation:

Airasia's foreign shareholders has dropped to 47.62% in 31 Dec 2015 from 52.96% in 30 June 2015 i.e. a reduction of 5.34%. Ironically, this is almost the same in terms of sellout by Wellington (5.056%)

Few trends in the last tumultuous period for Airasia and market:

- there has been attack on Airasia's accounting by GMT, a Hong Kong advisory firm;
- Airasia Indonesia went through a fresh injection exercise and in that event, it caused some concerns where it may lose its license to operate in the event it did not recapitalize;
- foreigners have been a net seller in Malaysian stocks;
- of course crude oil price has dropped to fresh lows;
- Airasia has the license to buyback as approved by shareholders in December 2015, as I presume as an act of self-defence;
- financials have not picked up although operational cashflow has improved.

If it takes Wellington to sell 5% in 6 months, they will need another 8 months to fully dispose off their holdings of 7.8% if they ever want to reduce to zero their exposure in Airasia. EPF may take a longer period.

What's your say?

In short run, market is a voting machine, the long run it is a weighing machine.

Mostly would know I took the view of bullishness as I am of the opinion that Airasia should head up rather than down as its peers in the same business has been enjoying record valuation due to the attractive low oil price. Obviously, my opinion have not been agreed upon by both EPF and Wellington. Well, they have more stocks to sell as compared to me whom have less cash to buy - but take note that I will still buy and with knowledge that I have the luxury of time.