Thursday, January 5, 2017

Deutsche Bank downgrades Airasia

Deutsche Bank just downgraded Airasia to RM1.75, which is below the price of RM1.80 where the 2 founders are committed to put in RM1 billion of new injected funds. Hence, I would suggest Tony and Kamaruddin to stop the private placement and instead do a rights at RM1.75 in which case is the fair price as provided by Deutsche Bank. It is also fair to all shareholders.

I however do have a comment on his paper, he commented that fuel price has notched up 33% and this would be a concern to Airasia. Actually, he did not remember that fuel price dropped more than 50% over the last 2 years from a height of USD120 per barrel. Today's price at USD65 is still about 45% lower from where it was paying for between 2011 - 2014. As close as 2015, Airasia (and most airlines) were still paying USD90 barrel oil.

In his paper which is not shared in the article, he also says that,"

Recall that Airasia announced its Board had approved the divestment of AAC ... In its 3Q announcement, the management said this leasing business had been valued at $1 billion. We struggle a little to understand how the number is derived, given the balance sheet numbers given in its 3Q16 results.

He further went on to say, our forecast does not include the impact from the AAC sale.

Seriously, I am perplexed. For an analyst, if he is looking at the current number from AAC's balance sheet, he will STRUGGLE of course because AAC is not just about current fleet but also future planes which AAC has secured. If a new leasing company is to negotiate for new planes, they will only able to get new planes perhaps from 2019 onwards (note that MAS mentioned they want new planes but only able to get fresh ones from 2019 onwards, and this is from last year's order) and probably at not so attractive price as Airasia group as the bulk buying is not there. Airasia's group of companies would also be the one leasing the planes from AAC which makes the leasing arm all the sweeter. This includes the future - hence he is struggling as he is looking at numbers alone, not business.

Also, if he is to say, the forecast does not include the impact from AAC sale - that is weird as even if Airasia is to not sell the leasing subsidiary, value is value. It is the same as AAC is already ring-fenced. It is part of Airasia hence the value of USD1 billion is still value of USD1 billion. If it is USD800 million, then it is USD800 million. He cannot say, he has yet to look at the impact from the sale especially if one is to use SOTP as the valuation method. He has mixed up fundamental valuation against technical reasoning.

Remember, "Value is what you get, price is what you pay." Further, in valuation method, he says he is using SOTP, which I assume is Sum of The Part valuation. Which school of SOTP is he from if he excludes AAC?

No wonder Deutsche Bank is struggling!

Note: Sum of the Part valuation is a method which one will take individual company from the group example MAA, TAA, AAC, IAA etc. do valuation based on its individual subsidiary or associate, after that sum them all together. Hence, he cannot not include AAC valuation be it internally or from external parties! Technically, if someone wants to downgrade, he/she should not use SOTP as SOTP is the most optimistic of valuation being provided for any company with several substantial subsidiaries. That person should be a technical chartist as charts can provide a price (not value) out of wag.

I also would like to note that based on his SOTP method, he valued Malaysia Airasia at RM0.88 which is around RM2.45 billion (2,782,974,080 x RM0.88). On the other hand, based on market value, he values Airasia's stake of 45% on Thai Airasia at RM2.701 billion. This means he values Airasia's 100% stake of a bigger MAA at a lower value than its 45% stake of Thai Airasia. As a note, 100% of MAA's profit this year (year 2016) is 2x 100% of TAA's profit.  Again, I am perplexed, for things which should include the future, he looks at current. For things which he should also include current, he looks at future.

He also gives zero value to Indonesia Airasia - i.e. zero value for all the hard work. I should remind Tony Fernandez of the day when he bought Airasia for RM1 from DRB-Hicom. Perhaps anyone would offer that to Tony for IAA?

3 comments:

panaceaasia said...

The analyst is a CFA. A highly sought after qualification.

tiongsoonho monicaysk said...

He can also be a PHD in finance but doing a sloppy job. Qualification does not always count, it is the quality of work that counts all the time...

felicity said...

Usually the successful entrepreneurs are the smarter people because they are able to look at things from a wider perspective and battle hardened as well. airasia's entrepreneurs arev one of them