Thursday, March 3, 2016

What I think of the recent run in Airasia and AAX

Recently, both stocks have been largely traded so much so they have become speculative in nature. That's not good as I was hoping for much less speculation as it would probably allow these stocks to be traded closer to its actual value. Of course in terms of performance, in the eyes of most shareholders, Airasia had turned around while AAX for many quarters of losses (8, I believe), this is the first quarter which it has recorded a profit. As I have highlighted before, they in fact were already signs of improvements few quarters ago. You can read them here, here, here and here. But most people just looked at the last line i.e. PAT.

I have written a lot about both companies (Airasia especially), even promoting the stock as I have thought that there are never such opportunities that comes along that often. Usually when a stock has gone down significantly, they are either facing huge cashflow problems so much so one will need to understand in detail the works of the business or fundamentally have they really deteriorated (example some of the oil and gas services companies today)? In the case of Airasia, it is not so. Some harped on the huge debt in the balance sheet. Agreed, but what's clear is that the company is generating significant cashflow from operations (to more than cover those debts) and the stocks were traded at such a huge discount. So, am I buying cheap or am I buying great companies. Cheap - yes. Great companies - more like good company with room for improvement but in a competitive industry.

Both Airasia and AAX have still some areas to improve - such as make sure the balance sheet are stronger and for Airasia, making sure some of the operations such as Philippines and Indonesia to turnaround fast.

I am hoping and forecasting that these 2 stocks to perform even better in the next 2 quarters at least (due to the lower oil prices which are to be even better felt now - 2016), but one should look at the fundamentals in the long term. The fact of the matter is that to be great, Airasia (especially) needs to continue to invest. It is in a growth space in a seemingly mature industry. The mature players (SIA, Thai Airways, Qantas) are grappling with competitors whom have newer style of doing business and to a large extent, many governments or airports have changed to suit the market conditions. An example, Bangkok reinvested into the older airport (Don Muang) and turned it into a hub for low costs carriers. Malaysia has KLIA2. Singapore's Changi did something as well. Add on to that, the Malaysian government has implemented e-visa for Chinese nationals - all these are done for better travelling experience and they help Airasia and AAX.

Aren't those calls for continued reinvestments. If one does not invest and stay within their own countries only, they are calling for trouble. The fact is that Asia and larger extent ASEAN is so much interconnected that no low costs airline can just operate within its own country.

From this, I would expect Airasia to face turbulence still in its growth path but it is necessary. Every single investments into a new country will need many years to achieve first time profitability. And look at it, Airasia has still to see profits in Indonesia, Philippines, India, Japan and it is talking of going to Vietnam as well.

Yes, the recent drop in oil price and more mature and older traditional airlines coming to their senses that they cannot rely on their government to continue to rescue them allow Airasia to speed up the process of its continuous investments. This is a big plus in considering in the purchasing of this stock - not whether they can reach RM2.00 by next week.

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