Monday, January 15, 2018

Airasia: The REAL BIG Picture

Before I go onto the topic which I want to discuss above, I would like to be clear that unlike some of the blogs out there, I will try to stay out of writing a particular company especially when the stock price of the company is rising.

This is because during a run up of "that" stock, investors being short term to medium term sometimes are not sure what to do. When a particular stock attracts attention, there could be investors who do not look at the underlying fundamental anymore but could be buying because other people are buying. They buy based on the volume and up-trends of the particular stock.

I usually stay away because I am worried that my writing may influence the purchase (or selling) behaviour. I do not particularly cue people to purchase because I do not want to get into a situation where it is overbought - and I am not confident enough to  say whether it is overbought or not.

Usually, when I get interested and felt that the stock is attractive, it will most probably be at the period where it was dropping or stay very attractive in terms of VALUE (NOT PRICE).

This happens throughout my writing on several stocks - among them Ekovest when it rose from RM2.00 (before split) to above RM3.00. Similarly, many years ago DKSH. If one may have noticed, I also wrote about Latitude Tree when it was 60 sen. That goes to others as well like Insas, Bonia etc.

Now I want to get into Airasia because of some frustration over comments which I do want to get the impression on the fundamentals right.

As in many of my holdings, be it WCE, Ekovest, TA, Ecoworld International, I usually look at the fundamentals over a very long term. I wrote the most about Airasia when it was trading at RM1.50 and below - where at that time it was at ridiculous price, and in fact my writing was critically put down by some. That on hindsight is good.

Today, as I am writing it is trading at RM3.97. You hence can blame me for not following what I mentioned above - however, one can be assured that my comment on the below is purely genuine and I am not selling in the near future.

What is the BIG PICTURE for Airasia?

  1. It is playing in the tourism space and tourism is growing more than the average growth of an economy. Why is this important? Well, we do want to invest in a space where growth is high - and from there look for the best or most exciting player out there. Luckily, Airasia is a stock that is traded in Bursa and run by Malaysian and it is potentially the most dominant low costs carrier in Asia.
  2. It (Low cost carrier business) is now not a low barrier of entry business - it used to be a lower to barrier entry business, but the consolidation or rather weaker players opting out is consolidating the play. New would be players now know it is not easy to create and keep the business stay profitable or alive. Airasia is one of the most dominant player in its space - which is low costs in Asia. Low barrier of entry means lots of competition, while high barrier of entry - means competition is more manageable.
  3. It is run by a group of capable entrepreneurs. 2 keys word here - capable and entrepreneurs. Even in a airline business environment where some of them are run by bureaucrats, you want the entrepreneurial spirit to be there, and they must have that liking and capability to be there. The Airasia group amazingly used to be a group of music industry people who were running airline business. Today, they are "true blue" airline people as they already have more than 15 years of experience and - they are doing very well. Also, unlike few years ago, Tony is much more involved today as against the days where he was stretched into F1 and EPL.
  4. Costs is more manageable for airlines - especially low costs airlines. Oil used to be USD50 a barrel. More recently, it has gone up to USD70. 3 years ago however, it was more than USD100. The shale venture in US very importantly, act as a balancing act for the price of oil. This is very important as jet fuel costs comprise 25% to 30% of an airline costs. I obviously do not know whether how much more higher oil price will go but I guess shale is keeping oil price in check - OPEC is no longer as strong as what it used to be 10 year back. Having said that, the current oil price at USD 70 will impact Airasia a little - and it will not enjoy the costs as per a year ago. That however may be partially balanced out by a stronger ringgit - as their lease and purchase of planes are all in USD.
  5. Between low costs and full fledged - it seems that low costs is the model to go. I have mentioned before, even SIA is getting serious in low costs - by buying Tiger Airways. I trust the foresight of many of the Singaporean managed companies.
  6. Having said whatever, Airasia - I find is one of the most visionary airline company. The fact that they spend effort, time and money into data and automation, shows that they look at the future rather than the current. I hence am seeing a portion of its profits to be spent on tech investments. It takes guts and vision to do that from the management perspectives. To those investors out there, do not just look at Airasia's revenue and profit numbers - do look at their strategies and what they do operationally.
  7. In Malaysia, MAS is no longer competing on price, as much as it used to. Positive for MAS and Airasia. This is because MAS realise it needs to get profitable.
  8. Airasia's strategy can be dynamic. It is not dependent on a single market anymore. If Thailand is tough, it can expand into India for example. Similarly, few years ago when Indonesia was tough, it expanded in Malaysia. That model works best especially when it is committing to plane purchases. Its size and strength allows it to have a better negotiation power.
  9. The owners (controlling shareholders) are partially debt funded. This I have learned a lot - some companies can be very attractive but if the controlling shareholders are not interested - to be even fair to minorities - in terms of sharing, the share price may not rise. Tony Fernandes and Kamaruddin have geared to increase their shares and they will need to pay interests from their debt. Hence, capital appreciation and dividends are important to these shareholders.
Airasia is not all rosy. I am mindful that it is still a high capex business, but so are the rest of airlines. What is important though is that the operational cashflow is strong to address the capex expenditure and with other airlines getting more serious into staying afloat price competition is more manageable.

Airasia will still get into some bumpy (or turbulent) ride, be it in its price or profitability - however, I see it to be the doing well in the long run.


Tam TC said...

Hi Sir,

I am equally confident and bullish about Airasia like you. One of the biggest attractions to me, where a lot of people have overlooked is their immense potential in China, which Tony termed it as “the last piece of the puzzle for AirAsia”. I have asked Airasia during the recent EGM about the latest development wrt their China JV. Tony responded that a major announcement on the JV will be made in the span of next few months. This announcement will have more clarity whether Airasia is ready, or otherwise.

Tam TC

felicity said...

Hi Tam

I guess China, India are all pretty competitive. The strength of Airasia is that they have model to compete, and they can hold their own.

These are all huge opportunities and highly competitive as well.

Let's see.

shrobin said...

Feli, can you comment on AirAsia's valuation with relate to Hainan airline sale?