Photographer: Charles Pertwee/Bloomberg
Outspoken AirAsia boss Tony Fernandes hit Twitter this summer to complain that Kuala Lumpur airport’s fancy new international terminal was literally sinking. Frustrated investors in Asia’s biggest low-cost airline could level a similar gripe at Fernandes about its share price.
AirAsia (ticker: AIRASIA.MY) has had a horrible 2015. After its Indonesian subsidiary lost a plane on Boxing Day, the airline has also had to chart a flight-path around a plunging Malaysian ringgit, circling short-sellers and struggling regional operations. The drop-off in oil prices hasn’t given much relief either.
The share price has been in a tailspin and AirAsia’s valuations look cheap as a result. However, the stock is cheap for a reason. Allegations of accounting shenanigans and regulatory issues in Indonesia have been less appetizing for investors than an in-flight meal. From MYR2.30 a share in June, the stock fell to a seven-year low of MYR0.75 a share in late August. It’s since regained altitude to MYR1.37 a share on a proposed share buy-back and interest from bottom-fishing investors. While the stock currently trades at a bargain valuation, AirAsia’s days as the region’s premier budget airline are behind it. Not only does it face more intense competition, it also is troubled by regulatory wrangles and foreign exchange woes.
The airline’s second quarter numbers underscore why investors have been cool on the stock. Profits slumped by a third, while revenues were flat year-on-year. Passenger numbers were up an unexciting 6% compared to a double-digit rise in the previous year.
More concerning is that all of AirAsia’s regional joint ventures, excluding Thailand, are hemorrhaging red ink. Indonesia, the least profitable out of the group, narrowed its deficit to MYR272 million in the first half but carried 22% fewer passengers than a year ago. The Filipino operation performed dreadfully, with losses widening 42% to MYR117 million even after cutting flights in this market. The one bright spot was Thai AirAsia, which was MYR143 million in the black. But Thailand’s tourism industry is struggling after a bombing that killed 17 in Bangkok in August.
The company’s overseas joint ventures, a structure required due to foreign ownership laws in these countries, have placed AirAsia in the crosshairs of short-sellers. Hong Kong-based researcher GMT alleged in June that AirAsia needed USD1.9 billion to pay down debt and the group was “milking” lease and maintenance deals with associates to beef up its own cash flow. “AirAsia makes more money selling stuff to its distressed associates than flying people,” reckons Gillem Tulloch, GMT founder.
The airline denies these claims and has cried foul to Malaysia’s Securities Commission. It insists the Indonesia and Philippine operations will turn a profit this year. It’s also planning to recapitalize them and wants the associates to IPO within two years.
Tan Kee Hoong, an analyst at DBS Vickers Securities, who has a Hold rating on the stock, tells Barron’s Asia the performance of Indonesia AirAsia is the biggest headwind facing the carrier. With a population of 250 million and a burgeoning middle class Indonesia is the new golden goose of Southeast Asian aviation, but AirAsia has struggled there. The airline’s presence in the country is small at 10% of market share, compared to domestic operators Lion Air’s 40% share and Garuda Indonesia’s (GIAA.ID) 20% share, data from CAPA shows.
The tragic loss of QZ8501 in December not only ended the airline’s unblemished safety record but also jolted dozing regulators. In 2015, Indonesia hastily brought in mandatory fare hikes for budget carriers in an illogical attempt to improve safety before scrapping them within months. It’s also threatened to ground Indonesia AirAsia and 12 other airlines if they don’t address the negative equity on their balance sheets. How serious this proposal is isn’t clear. AirAsiaX Berhad (AAX.MY), the airline’s separately-listed long-haul spin-off, also faces threats from Indonesia’s regulators who are seeking to enforce rules that require airlines to operate at least 10 aircraft, including five that are owned. This means the company may have to expand its fleet to comply. To put it mildly, the policy environment doesn’t look sympathetic. Additionally, the weakness of Indonesia’s rupiah isn’t helping either.
But AirAsia’s foreign exchange problems run much deeper. Export-dependent Malaysia’s currency, the ringgit, has plummeted by as much as 25% versus the greenback so far this year, plumbing a 17-year low on lower oil prices and concerns about China’s economy. Almost 60% of AirAsia’s operating costs – such as jet fuel - and 85% of borrowings are denominated in US dollars. As the ringgit weakens and dollar strengthens, this means AirAsia’s debt gets more expensive. DBS Vickers’ Tan says foreign exchange losses for fiscal 2015 will be at least MYR700 million.
The fall in oil prices isn’t giving AirAsia much reprieve either. About 50% of the airline’s jet fuel bill, which make up about half of operating costs, is hedged. This means the company is paying about USD85 a barrel for fuel, compared to the current Singapore jet kerosene spot price of about USD60 a barrel.
AirAsia says its fuel hedges will have unwound by the 2016 financial year, but cheaper fuel doesn’t always translate to a bigger bottom line. Passengers generally aren’t stupid: they know oil prices are way down and expect some of these savings to be passed on in lower fares.
In its own backyard, AirAsia is also looking over its shoulder at the competition. Malindo Air, a new-ish Lion subsidiary, is expanding its network and adding capacity out of Kuala Lumpur. Beleaguered Malaysia Airlines, which is now back in private hands, is slashing prices to lure back flyers. However, its restructuring will see it cut capacity and scale back its network, which could be to AirAsia’s advantage.
AirAsia looks cheap but looks can be deceiving. The stock trades at just six times forward earnings and less than book value. The beaten up book value second means the value of the metal in AirAsia’s planes is higher than the company’s market cap minus its debt based on recent prices says Maybank analyst Mohshin Aziz. That’s remarkable. However, Aziz, who has a Buy rating on the stock, admits such a steep discount suggests “a visible trust deficit between the investors and the company.” In other words, proceed with caution.
Ammar Roshidy
The writer is just having a "shock sendiri" session, hitting out at someone else rice bowl. I hope you had your fun, because I did.
2015-11-12 09:41