Art of Investments


Publish date: Mon, 06 Mar 2023, 08:59 AM

In the latest results season, 4 stocks reported results which stunned the market and caught my eye. I noticed that one of the stocks had generated significant interest last Friday and so I will post it now itself without any delay so that I won't be late.

The name of the 2nd stock is AAX.

Everyone knows what AAX does. It is a low-cost airline which focuses on medium haul flights to South East Asian destinations. Pre-Covid, AAX was on a steady decline as with the rest of the industry due to an oversupply of aircraft which got worse and worse. Pre-Covid, AAX had reported hundreds of millions of Ringgit in losses in 2018 and 2019 itself. To make matters worse, AAX had made a ridiculous order of 108 Airbus planes costing tens of billions of Ringgit even with the oversupply in the industry back then. 

Everything started to change in November 2021 when AAX had a debt restructuring exercise where they threatened creditors that non-acceptance of their proposed scheme would lead them to close down and the creditors would lose everything. AAX's scheme involved terminating all existing contracts and turning RM34 billion in liabilities (owed to Airbus, lessors, Malaysia Airports, banks, passengers etc) into just RM200 million! Guess what? The creditors agreed! 12 November 2021 was the day the creditors voted for the resolution and AAX effectively became one of the world's healthiest airlines financially on that day!

AAX reported their results on 22 February 2023 which stunned the market and with those set of numbers, the creditors would obviously feel cheated now. However, the biggest winner is now actually holders of AAX shares. AAX reported a net profit of RM153.5 million or an EPS of 37sen. Stripping out unrealised gains, AAX reported a core net profit of RM90.2 million. Core profit excludes profits or losses that are one-off or unrealised. This is why it is called core profit, that is, the profit that is sustainable going forward. In the latest quarterly results report, it was disclosed that AAX incurred a positive other operating expense of RM48 million and an unrealised FOREX gain of RM15.3 million. Excluding these unrealised and one-off gains, AAX's core profit would be RM90.2 million (153.5 - 48 - 15.3) or EPS of 21.7sen.

We must also not forget that AAX reported a positive operating cash flow of RM93.6 million as disclosed in the latest quarterly report.

Can this profit sustain? The answer is yes and the core profit should get even larger in the next quarter. Firstly, a few airlines in South East Asia had gone bankrupt during the pandemic and many airlines in this region, including AAX (which had 24 planes pre-covid and has only 7 now), had also returned many of their planes to the lessors. These lessors have then re-allocated those planes to the West (Europe and US) due to the high demand there. Flights in the West is actually now operating at above pre-Covid levels. These have resulted in a shortage of aircraft in South East Asia. To illustrate this shortage, AAX actually sees themselves getting back to their pre-covid 24 plane levels only in 2027!

The core profit next quarter will also get larger because jet fuel prices have fallen significantly by around 20%. This reduction in fuel cost will flow straight to AAX's bottom line next quarter. In the latest quarter, AAX disclosed that they consumed 255.4k barrels of fuel at a price of USD129/barrel. Jet fuel is now at around USD100 per barrel. At the difference of USD29/barrel, AAX will earn an additional profit before tax of around RM33 million (USD29 x USD/MYR rate of 4.4 x 255.4k barrels) next quarter just from fuel cost alone. 

How to value AAX?

We can take a look at our neighbour Singapore Airlines which also has low-cost operations (Scoot) and is also seeing a big boom in earnings. Annualising SIA's latest record high quarterly profit of SGD628 million, SIA is trading at a PE of 6.7x. Using SIA's PE of 6.7x and AAX's annualised core EPS of 86.8sen (21.7sen x 4), AAX is valued at RM5.82! Even if we are extreme and halve the PE to 3x, AAX is valued at RM2.60 and this gives an upside of 423% at the current share price of RM0.805.

Is the RM5.82 valuation unreasonable? It's actually not. If we were to look back at AAX's historical share price, it can be seen that AAX used to trade at RM5 in 2017 when it was making just RM50 million in quarterly profits! At the share price of RM0.805 now, AAX is trading at a PE of 0.9x and the undervaluation is too extreme. It is a matter of time before AAX's share price increases very significantly to reflect the strong earnings ahead.

*i3investor is having problems with the system and I cannot upload photos. Once the problem is fixed, I will update the post with photos.

UPDATE 1: Thank you for all the messages of gratitude. If you had read my article, bought and made good money, i am delighted for you. But always remember that a furious rally like this will always come with furious profit taking. There's no way to predict when this will happen and how deep it will be, so do take profit at RM2.50 now.

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