Monday, December 4, 2017

Airasia: Analysts have been chasing updates than giving us directions

If an investor is to look over here and perhaps here, we can see that over the last 2 years, analysts have been upgrading their valuation on Airasia. To me, Airasia was already worth more (back in 2016) than what the most optimistic valuation given by any analysts in town, be it MacQuarie or MIDF.

Let me tell you why this is the case, besides you can also read this most written stock in my blog. Since, 2015 or even before that, analysts have been chasing after the the results and they forgot about the forest where Airasia is preparing itself to be the king of the airlines (in Asia). They have been dwelling into the numbers and let me quote what the latest from TA, whom have just upgraded Airasia's valuation from RM3.76 to RM3.83 based on Airasia's latest 3rd quarter numbers.

First paragraph, "AirAsia’s 9M17 core profit of RM1.34bn beat expectations, accounting for 91% of our full-year forecast and 103% of consensus estimates. The variance was mainly due to higher-than-expected RPK of AAB and TAA operations."

And this comes from Public Bank's analyst, "For 9MFY17, AirAsia core net profit was RM1.27bn, which came in above our and consensus full year expectations, accounting for 86% and 97% respectively. The discrepancy from our forecast is mainly due to better-than expected improvements in subsidiary and associate contributions. We raise our associate contribution estimate which, as a result, increases our earnings for FY17-19F by an average of 18%. We upgrade our call on AirAsia to Outperform, given an upside of 16.5% to our revised target price of RM3.69 (previously RM3.19) pegged on 8x FY18F EPS."

As I have mentioned, the analysts have been dwelling still on 2017 and 2018 numbers i.e. the furthest they have looked. What they have forgotten is that Airasia is positioning itself to take market share from MAS and Malindo in Malaysia, Cebu Air in Philippines, Nok in Thailand and several more markets. This strategy is taking time, and the results will be seen right up to beyond 2020s as they build their portfolios of routes.

Beyond the market share gain, one must also remember that tourism business is growing well exceeding the normal growth of a country i.e. between 4% - 5%. One can check that air travel is growing by double digit percentage. You can just check around - especially this month. There is literally no middle-income individuals that are NOT travelling.

Why is this?

Because of lifestyles change and technologies, people are travelling more than ever, but spending much less than ever on a single trip. They take Uber, Grab, Didi - they stay in Airbnb's lodging. They take the subway, MRTs.
This also means that people are travelling more trips. Who are the clear winners? Low costs airlines and to some certain extent, the full fledged airlines.

For airline analysts, they should look beyond an airline business, but look at the travel business. What has changed and what has not. Besides airline, Airasia is in the business of (digital) travel.

Even with the above range of RM1.27b to RM1.34b of core net profit for Airasia for the first 9 months, we can almost predict that its core net profit for the year is going to be RM1.8b or more as the final last quarter is typically a huge quarter for travel in this region. Profits and revenue are typically going to be more than 35% of the full year number. With the projected future, we can actually give a decent premium for Airasia - which is not 10x PE projections as provided by the TA analyst. So let's say for the fastest growth market operated by one of the fastest airline, should it not be in the range of 16x to 20x PE? What is a 16x PE for a core net profit of RM1.8b? RM28.8 billion valuation over at the more conservative side - which I am afraid to think, as Airasia's current market value is RM10.6 billion (RM3.17). On the more optimistic side it can be RM40 billion! Why not? A 20x PE for an above average growth company in a fantastic market space and current core net profit is almost RM2 billion.

The Airasia's management has actually done a lot in addressing the analysts - and in fact they are one of the few which has quarterly briefings. They in fact had an Investor's Day for Analysts only in October this year, and what do I get from the updates? Tony Fernandes talked more about its digital roadmaps. Can't they see, they are actually looking at a much dynamic company (still with profits to show) rather than our typical Malaysian companies.

I am not surprise that Tony Fernandes is frustrated with its valuation but I can only say he has targeted the wrong group and not provided the true messages. He has been talking to the group of guys who are taking quarterly reports and making assumptions from that results. They are the ones who dwell more on the deferred taxes and hedging policies than the business.

(I know because I listened to all the analysts briefings I can get hold of, watched the entire session of Investor's Day except the performance by David Foster, attended one of the sessions presented by its Chief Digital Officer in an event which excites me.)

All I can say is to the research firms, provide more budget for your airline analysts get them more exposed to the business than just the financial numbers. Attend beyond analysts briefings. With that, I am hoping that they provide me with more directions than updates.

To me on Airasia, what its tagline which was created when it started, "Now Everyone Can Fly" is even more than ever!

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