Sunday, November 27, 2016

Airasia: Article on Bloomberg quite inaccurate

There was quite a bit of brouhaha on an article on Bloomberg which I think is largely to sell readerships.

One of the statement, which reads as below:

I do not think it works for Airasia like what is mentioned unless the Airasia group is not telling us the truth. See below:

From 3Q15 financial statement
The above basically shows that Airasia is doing its planning for the deliveries of newer A320neo aircrafts which has better mileage and caters for 186 seats for Airasia (an extra of 6 seats from its current fleet). 6 extra seats makes a significant difference. It does not seem to be doing a financial engineering as mentioned in the article on Bloomberg.

Further testament to that even if it is doing a sale and leaseback, the accounting treatment does not allow Airasia to be doing a financial engineering as mentioned. See below which is picked from its 2015 annual report.

Nowhere do I see Airasia locking in huge profits for its sale and leaseback in its accounts in the last few years. Yes, it does make profits from its leasing business but not to the tune as mentioned in the article.

I do agree that Airasia's financial performance for its airline business can be more volatile, which is why there are seemingly good interests for its leasing arm which has much less volatility.

What I think of the proposed sale of AAC
An aircraft leasing company seems to be able to garner a good 20-30x PE while as most people know Airasia is trading at mid single digit PE now. If the group is able to sell the leasing arm at a good price, it will see its balance sheet much improved while it can get ready for the deliveries of the A320neo which is much important for the next stages for the group as its fleet is getting old.

From my reading, not all the new planes that it purchases will be under the leasing arm (although new deals including the A321 does include AAC to have options for some of the new planes. This will make the sale of AAC much sweeter, in which case a DCF from the financial numbers of the company would probably be much better).

I also do not think the group would be so stupid to obtain all its planes under lease as a combination of owning and leasing are being done by airlines such as Southwest and Ryanair.

I think if it is able to get a good price for AAC, would be good to sell as it is now focusing on growing the brand rather than being also deemed to be a leasing company - which it should not be. Airasia is a low costs airline which it does best.

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