Tuesday, January 24, 2017

What's wrong with the perception on Airasia?

Which stock in Malaysia probably has the most followings among fund managers overseas but yet it is still valued at below $2 billion? Airasia. It is over 50% owned by funds overseas, has more followings than any Malaysian blue chips and covered the most among Malaysian companies by Bloomberg but yet valued at a lower valuation that Grab. (Anyone knows Grab yet? - You know, if you mix around the entrepreneurial community, even Grab is no longer a Malaysian brand but more of a Singaporean now. I have nothing to comment here.)

Why?

For a young company in a still young emerging space, people expect it to be valued at low single digit PE, while people can allow Grab, Lazada to continue to lose money for many more years. We expect Airasia to start making profits in its new country that it ventures in i.e. India, Indonesia, Philippines, Japan but can forgive many others thinking that what Grab or Lazada does is "disruptive". Let me tell you this, Airasia has delivered for many years. Grab, Uber, Lazada and many more companies in the disruptive space have yet to deliver - financially. 

Now, my question is - isn't Airasia and several other low costs carriers disruptive? Are they too old now to be categorised under the air-transport disruptive space? There is even a difference between Airasia and many more of its competitors in its space - such as Tiger Airways (which was acquired by SIA), Cebu Pacific, VietJet, Indigo etc. Airasia goes into other countries but the others largely still operated within their own country they excel in.

For the moment, we are giving negative value for a company that attempts to go overseas. Typically, my question is do any of these guys know how business works? In my previous article on Airasia, there is this Deutsche Bank analyst who gave zero value to its businesses in Indonesia, India and Philippines (if I am not mistaken) after having invested hundreds of millions into the countries.

I am asking - if I want to get into a country and think strategically, then I decide to put a lot of money and effort and then to be negatively valued, is it worth the effort? To business people such as the founders of Airasia, it is not all the time valuation by analysts but execution that counts. It is about getting bigger, growing and taking risks - taking positions. How many Malaysian businesses think that way? Try looking at the KLCI Composite companies.

But yet we do not cherish the entrepreneurial spirits of this Malaysian company, and giving them a lot of challenges in our own backyard. For one, I do not see the differences in treatment that is provided to Airasia compared than Malindo for example. One may say, it is free-competition but what about the preferential treatment provided by Singapore to its own country airlines. (Do you see a Singapore Airasia?) Philippines is similar and so are India, Japan, Vietnam and so on.

Very few people put a price to Airasia's brand value. When I mentioned how important that they have managed to partner Tata Group in its penetration into India, I think very few people understands it. If I say, (despite the recent cases) Tata is the most respected Indian company, very few people sees it that way yet. But if we talk to business people that try to do business into India, having a partner like Tata is sign of success.

I have been following Airasia's reporting for many years. I would say it has improved a lot but a lot of times, these improvement is not cherished. Because it is such a well known Malaysian brand and so much followings among the international investors, it has to do more than many more Malaysian companies. I suggest these investors to read Focus Lumber, MagniTech's Annual Report (no disrespect to the investors of these companies) - not the financials - then do read Airasia's and go to its website. Do you see the vast difference?

(Until now, I cannot understand the business model of the companies I mentioned although I know Focus Lumber is into "Lumber" and Magni Tech is into "textiles".  That's all I can decipher besides looking into their accounts.)

If one can accept these companies (as investments) who are much more inferior in their reporting, what do we expect out of Airasia? Yes, they are challenged to the standard or reporting provided by the European, US airlines because often Airasia is compared against them - this is good. But the more you comply, the costlier it gets. (I am not against good reporting, but in fact pro it - however costs of reporting is a fact)

The recent case involving Rolls Royce - I see it as a problem (although it does not directly affect Airasia, as it does not do business with Rolls Royce as announced). This is because Airasia Group (or Tune) of businesses is so large that it involve many inter-company dealings and there could be much more scrutiny. I have to admit I myself am not too happy with some of the transactions, and there seems to be over-planning on its structuring.

As I said above, over time Airasia has adjusted a lot on its reporting format and continues to spend time and effort on improving the investing public's understanding on the group - but it seems the more they try to do, it has not translate into much.

As good as Tony Fernandez being a communicator, I think this part there seems to be a lack of trust towards the brand. He has gotten the message across towards the business public (such as Tata, Rakuten) but not the investment public and a lot more education is needed, as it seems.

6 comments:

JiaYeo said...

I have never looked into Airasia so this is just my layman opinion. If you talk about the brand value of Airasia, I presume you are talking about things like passengers preferred to fly with Airasia over other airlines or Airasia has sustainable pricing power, something along these lines, or else there won't be any 'value' inside the brand afterall. So you probably need to reason if Airasia has the ability to consistently raise their selling price compare to their peers in the long term?

On another note, no doubt Tata is a respectable company, but as the recent power struggle has shown, or their disastrous Tata Steel acquisition in 2007, I'm cherry picking events for sure, but it does show they aren't that respectable from shareholders point of view. And besides, partnering up with Tata has little indicative value as to why Airasia should be worth more than $2b or why they are undervalued.

And yes I agree Magni AR is a pile of copy paste shit and FLBHD at least faired better, if you include their IPO prospectus.

On Grab, there's no reason why it should worth more than Airasia on a comparatively basis despite it is not as proven as Airasia - as you mention, it lies in their business model. Similar to Uber, their business model is exponential, winner takes all, potentially network effect. That's why Uber is worth so much and spend so much to win the game, because there's probably no room to be the No.2. Whereas airline is far from being an exponential business, for one, they are capital heavy, and you know that more than me.

And since you are planning to hold AA for 10 or more years, why are you even concerned with people's perception anyway.

panaceaasia said...

JiaYeo,

Excellent advice.

felicity said...

Hi Jia Yeo

Thanks.

On brand value, certainly there is - it is not all about pricing but the routes, frequencies etc. In today's world, it is also getting people to the habit of buying and transacting as well as being comfortable with the airlines. One can still compare prices but it is also about economies of scale. In terms of airlines, it is also about costs of ground handling crew, RASK, costs per ASK etc. So, in places where certain airlines tend to do well, it is harder to unseat the incumbents.

In a way this is quite similar to Uber and Grab. These companies will still compete cities to cities. I agree that Uber and Grab over time due to their low capex model, if they hit it - will hit it big. I am quite positive over the Uber and Grab business model actually, but the question is by when will they be cashflow positive. I just do not know how to value them. I guess if one is close to the companies, they will use a discounted cashflow.

On FLBhd and Magni-Tech, they have my respect, but the message in my article is that there are lots of data, information provided by Airasia as compared to these companies.

I disagree on the perception over Tata - again there is a difference between story and perception. Press will still be press - they will take opportunity over anything that can sell news. The voice on the ground is that Tata is the company to work with. This is probably why Mistry is being let go as to the Tata group, their promises are their bond.

Well, on holding AA for 10 years, certainly I look at the business positively over the longer period of time, but one will still be vary of its change of directions and reactions to competition.

Jason Ho said...

A literal quote, whenever Warren Buffett even thinks of buying any airplane stock, he dials a counseling number that tells him no. Especially on air Asia, if you dig deep into the numbers, they lose money on each customer they pick up on flight. They then break even on the incidentals in-flight like food, seats, additional baggage etc. Finally, they only make money on their leasing side, basically renting out their unused planes to other carriers and smaller charters where their big discounts on billion dollar orders give them that small margin of profit. Now ponder this, which airline in the last 10 years has consistently made profits and grown bigger over a consistent length of time?

felicity said...

Ryanair grew almost every year except for 2009 and 2014. Its revenue grew from Euro1.7b in 2006 t0 Euro 7.5b. Net Profit from Euro350m in 2006 to Euro1.775b in 2016. That's 5x over 10 years.
Berkshire Hathaway is now buying airlines - not one but 4.

Anonymous said...

Hi , Felicity,

Can you elaborate more on your findings of focus lumber and magni tech?

I would appreciate your frank opinion on both these companies.

Thank you