Air Asia oh Air Asia

Do you dare to bet on EVERYONE CAN FLY????


AirAsia – a falling star?  - from Macquarie RESEARCH

AirAsia Berhad’s share was definitely one of the most talked about stock last week, with the weekly trading volume spiking up 387.8% week-on-week! Over the week, the share price fell 15.4%, wiping off RM918.4 mil. of the budget airline’s market capitalisation.

Now that the airline’s share price is at its lowest since September 2010, Macquarie Equities Research (“MER”) gave their view, via their report dated 12 June 2015, on the recent plunge in AirAsia’s share price. Similar to the Bloomberg’s consensus of 19 “buy” calls out of 25, MER maintained its Outperform call on AirAsia, albeit a reduced target price of RM3.04. Read on for the excerpts from the report titled “Catch a falling star”…

The stock fell 10% on Thursday, reaching its 4-year low with 78.3M shares traded vs its three month average volume of 7.6M. Concerns of late from investors MER spoke to are on the going concern status of its Indonesian and Philippines associate and potential impairment of inter-co loans. The company's FY14 audited accounts states a RM1.2B financial assets that are past due but was not impaired. MER believes the weakness in share price provides opportunity to accumulate the stock and thus reiterate its Outperform rating.

MER believes current share price only reflects its Malaysian business + assumed impairment (RM1.75) and excludes a profitable Thai AirAsia (fair value of RM0.60). With this note, MER performed a cashflow analysis for Indonesia AirAsia (IAA) and Philippines AirAsia (PAA) and conclude the following investment positives that should help its cashflows: 1) lower fuel price, 2) network optimisation with no additional new aircraft, 3) pre-IPO exercise for IAA where the cash raised could be used to pay inter-co loan from AirAsia and 4) cost savings from retirement of older fleet at PAA

The facts. In its FY14 FS audited by PricewaterhouseCoopers, financial assets that are past due but not impaired amount to RM1.2bn (RM0.45/sh). No impairment was made as management is of the view that these amounts are recoverable. Thus in the extreme scenario of a liquidation MER estimates a fair equity value of RM1.19 based on FY14A book value.

Is it recoverable? While lower fuel price are tailwinds for IAA and PAA, MER estimates cash from operations are insufficient to reduce interco loans in FY15 (refer to Figs 2 & 5). Cash from a potential pre-IPO exercise for IAA and sale of aircraft for PAA as highlighted by management are crucial for the two companies in FY15 to raise cash.

Earnings and target price revision
MER is lowering its FY15-17 EPS estimates by -5.5% to -2.8% incorporating the lower yields seen in 1Q15. Its SOP TP is reduced to RM3.04 from RM3.26 mainly from reducing Indonesia AirAsia FV.

Price catalyst
12-month price target: RM3.04 based on a Sum of Parts methodology.
Catalyst: Clarity on action plans to recover inter-co loans, assets monetisation
Action and recommendation
Reiterate Outperform.

CIMB Research retains Add for AirAsia but lowers target price
Tuesday, 16 June 2015
KUALA LUMPUR: CIMB Equities Research said AirAsia’s share price has reacted strongly to GMT Research’s report, which set a target price of RM1.23 as it believes a large dilutive rights issue is in store.

The research house said on Tuesday if AirAsia successfully secures new investors in Indonesia and the Philippines, the stock could stage a relief rally.

“This remains our base case, which is why we keep our Add call,” it said.

However, it lowered its target price, still pegged to sector average CY16 P/E of 11 times, as it cut its  FY16-17 core group EPS by 7%-10% on larger losses for IAA and weaker ringgit forecasts.

“Re-rating catalysts include AirAsia securing RM1bil in repayment from associates,” it said. 

CIMB Research’s base-case target price of RM2.26 (25% upside) is based on the belief that AirAsia will be able to avoid a punishing rights issue by successfully bringing new investors into Indonesia AirAsia (IAA) and AirAsia Philippines (AAP) and obtaining a RM1bil repayment of the associate balances owed to it.

This is on top of securing the sale and leaseback of 16 older planes for total proceeds of US$384mil (RM1.440bil); eight deals have already been concluded. 

The worst-case target price is RM1.11 (39% downside). In the event that AirAsia fails to obtain new investors, the pressures of funding IAA and AAP entirely on its own resources will probably lead to AirAsia raising new equity via a rights issue.

“Assuming RM2bil is raised via the issue of 2,000 billion new shares at RM1 each, our target price will fall to RM1.11,” it said.

CIMB Research said the best case will only materialise if AirAsia successfully finds a way to structurally make IAA and AAP sustainably profitable for the long term.

“While we have not seen this happen yet, we know that AirAsia has been hard at work to achieve this.

“Is it worth the risk? The 39% downside in the worst-case scenario against a potential upside of 25% in the base case (which is also the best possible near-term solution) does not look like a good bet.

“However, as this report was going to print, AirAsia announced a preliminary ‘solution’ that will see IAA and AAP receive RM360mil in new cash equity from its local partners, and issue RM750mil in convertible bonds. In total, the two associates will receive RM1.11bn, most of which will be used to repay amounts owing to AirAsia.

“The announcement of this ‘solution’ will likely put a floor on AirAsia’s share price, or even result in a relief rally, particularly when the short sellers cover their positions.

“In the long term, AirAsia still has to make IAA and AAP sustainably-profitable airlines,” it said.