Good Articles to Share
I'm Worried for Airasia and Here's Why - Alex Tan
July 21, 2016
Most of my followers are aware that I am very reluctant to put my money into the airline industry. The reasons can be found HERE. Besides, I was very uncomfortable with Airasia's issuance of shares to its founders to collect RM1 billion of cash. You may refer to it HERE.
So why am I worried for Airasia?
#1, Negative Free Cash Flows
Airline companies like Airasia have an extremely weak economics, which leads to unstable profitability. The recent spike in net profit and free cash flow was mainly due to the prolonged depression in oil prices. Without this tailwind, Airasia has been relatively weak in generating stable profits and cash flows.
#2, High Borrowing Costs
Finance cost has been a substantial part of Airasia's operating cash flows. It even exceeded the OCF in 2014!
#3, High Net Debt Position
As at 2015, Airasia had a net debt position of about RM10 billion! By looking at its free cash flows, I think it's near to impossible for the company to repay its loan purely by relying on internal cash generations.
#4, Overly-ambitious Plan to Expand
Despite of the above weak financial abilities, Airasia announced that it has placed RM61 billion of orders to buy new planes. This amount is close to 6 times of its current net debt position! So the question is how is it going to fund such overly-ambitious plan?
Clearly, getting more loans is no longer a viable way as it has piled up tonnes of borrowings. The only way out is to further look for external funding, either from the shareholders or private placements. Please note that I am not trying to make any predictions here, but I am trying to analyze in a logical way how Airasia will continue to fund this expansion.
Getting money from its current shareholder base (rights issue) is unlikely because the founders are shareholders of the company as well. Having injected RM1 billion of cash few months back, their personal cash piles would have shrunk.
Hence, it is extremely likely that Airasia's founding shareholders will fund the overly-ambitious expansion plan by diluting its current shareholders' interest. Please note that after the RM1 billion cash injection, the founders stake had increased from 19% to 32.5%. They have a lot of room to decrease back to 19%! If that's the case, current minority shareholders will face double-dilution of their shareholdings.
The accuracy of my analysis above is not important. What's more crucial here is that Airasia should not expand aggressively at the expense of the innocent shareholders (if what I predicted above is right). If you don't have the money, borrow or rights issue. When you issue shares, make sure that your shareholders get as much value as possible, which I don't think so in the airline industry - an extremely competitive, capital intensive industry.
Words of Caution
Expanding over-aggressively will only make yourself susceptible to failure in a big way. In short, the bigger you get, the easier to fail. After all, "Now Everyone Can Fly" is a very beautiful vision.
Please note that the portfolios I manage are not the shareholders of Airasia.
http://www.valueinvestingstock.com/single-post/2016/07/21/Im-Worried-for-Airasia-and-Heres-Why
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Discussions
4 people like this. Showing 36 of 36 comments
The keyword is be a savvy investor.
IF AA does implode or bust one day; if I said, then you should let go or cut loss.
All stock investing have risks including AA, (maybe AA higher risk, but return has been very high as well especially if one started before 1Q16 QR release rally).
2016-07-22 11:33
I'm a big AA fan, but its good to hear about the potential downside too. Still, as you said yourself, the airline industry is crazy competitive, so AA has to grow aggressively in an aggressively growing market, or risk losing out to smaller, hungrier airlines. If AA loses its dominant position, it will be extremely hard to claw back market share so why shouldn't they exploit their position at the top and just go for it? With their greatly expanded fleet, AA will pretty much corner the market on budget air travel in Asia. Its go big or go home time, bro.
2016-07-22 16:37
No matters what..as long you can make money..use our wisdom when to buy and sell. Some of the counters you recommend...never wake up n always look like dead..just wasting your money and time waiting..
2016-07-22 16:45
i not follow ... will enter once it cross 2.90. Gd counter but blady 1Mdb issue scare the shit out of me
2016-07-22 17:51
stupid worries. the jets are their assest. if sell all jets , AA will be debt free
2016-07-22 19:12
agree to alex because ,潛在風險是高負債，過度擴張，低利率，最重要是很難保持持續性競爭優勢。削價來保持競爭。油價高漲就會侵蝕凈利。
2016-07-22 19:15
Now is the time to harvest, not the time to worry
They will be a season to worry, but not now
2016-07-22 19:17
sell all jets?then?jz own opinoin, no harm to others.賣資產是為了還債？東尼大大是煲新聞高手。航空業競爭很激烈，很多是看機票價格，沒有什麼品牌效益。
2016-07-22 19:27
Worried ? Wanna expose to AIRASIA's Growth but don't wanna to expose directly ? Go for TUNEPRO.
2016-07-22 19:28
Alex, very clear u not understand well on airline industry.
Better u study more on global airline industry b4 come out with above analysis. No airline in the world can have zero debt and yet with high growth.
2016-07-23 13:02
Sao pei la. U just can't see the bigger picture. Now airline industry is growing.the new planes have larger capacity with lower fuel consumption. This business is about load factor and low operating cost
2016-07-23 16:49
Sometime you need silly people like that. If everybody so sharp, very difficult for us to make money ha ha ha
2016-07-23 16:56
Fundamental of airlines change. Go read the taiwan news i shared.
First, i maybe low fuel fpr next decades to come.
Second, china coming with new production on planes. Can help give more competitive pricing. Thus cost of airplanes also drop with lower fuel, double good new.
2016-07-24 01:25
You bring out good points
But now is the up time , can still hold for few months
After that must sell
2016-07-24 09:32
I am worried for XXX......fill in the blanks.
Cup half full half empty is always there 24/7/365 in the stock market.
No exceptions.
But tell you what.....you want to make big money you need higher beta stocks in your portfolio.
2016-07-24 09:41
that is why AA plan to list its leasing units. let this unit own most of the new planes n keep them out of AA books. a lot of airlines r doing that to keep liabilities out of books.
2016-07-24 10:38
Sostupid. Please give us you name, ic, email, phone number so that we can contact and agree with you
2016-07-24 11:13
this can be used for students..this is analysis is too simple..1)look at cash flow 2) see borrowing 3) see finance cost..well done..now everyone can be ANALyst..
2016-07-26 11:02
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
paperplane2016
WORRIED? sell airplanes later cashflows ballon
2016-07-22 10:57