Author: Icon8888 | Publish date: Wed, 9 Mar 2016, 09:39 AM
1. Introduction
Recently, Air Asia released a strong set of results for the December 2015 quarter. Many investors jumped in to take position. How good was the result actually ? Did the December 2015 quarter contain any one off gain ? Can the good performance be repeated ? Is Air Asia still a good buy at current price ?
2. P&L Analysis
To answer the above questions, I put Air Asia's past few quarters' results in a spreadsheet and did a quick analysis.
Plenty of pleasant surprises.
Key observations :-
(a) Fuel Cost
According to quarterly reports, Air Asia used 6.28 mil barrels of oil in FY2015 and average fuel cost was USD81 per barrel (being average of 88, 85, 77, 75).
To test whether my understanding is correct, I did a back of envelope calculation.
2015 estimated fuel cost = 6.28 mil barrels x USD81 x 3.90 = RM1,984 mil.
According to quarterly reports, total fuel consumption was RM2,001 mil. It seemed that the formula works.
I understand that the group has hedged some of its FY2016 fuel requirement at USD59. Lets use that to run a simulation.
By applying the same formula, estimated fuel cost for FY2016 = 6.28 mil barrels x USD59 x 4.10 = RM1,519 mil.
Fuel Saving = RM2,001 mil - RM1,519 mil = RM482 mil
Based on 2,783 mil shares, fuel saving alone is 17.3 sen per share !!!
Now you know why I ask you to sell car sell house.
(b) Revenue
This item is very important. One of the main reasons Air Asia reported such strong December results was because its revenue jumped Q-o-Q from RM1.52 billion to RM2.17 billion. We need to examine the figures to find out whether it can be repeated going forward.
As shown in table above, there were two main things that caused December revenue to spike. The first one was aircraft operating lease of RM728 mil, an increase of RM484 mil compared to previous quarter's RM244 mil. The company explained that it was revenue previously not recognised due to uncertainty of recoverability. If that is the case, it will be a one off item.
The second reason was higher passenger seat sales of RM1,133 mil compared to previous quarter's RM987 mil, an increase of 15%. In my opinion, this item is indication of genuine improvement in operational performance.
(c) Operating Expenses
Apart from fuel cost, other expenses such as staff cost, maintenance, etc remain stable and in line with historical performance.
(d) Associates
This item is also very important. In September and December 2015 quarter, associate losses was RM625 mil and RM225 mil respectively. We need to understand how those losses arise and whether they will occur again in the future.
For comparison purpose, the table below shows both Malaysia operation as well as those of associates :-
As shown above, 45% owned Thai Air Asia is quite sizeable. Its revenue was almost half of Malaysia operation. It is also profitable, with PBT of RM68 mil in latest quarter.
Indonesia Air Asia is 49% owned. Its revenue was about 1/4 of Malaysia operation. This associate incurred forex loss of RM324 mil in December 2015 quarter, and was the main reason behind Air Asia's massive associate losses of RM225 mil.
Philippines, India and Japan's operation is quite small.
I am relieved to find out that the huge associate losses seen in December 2015 quarter was due to Indonesia Air Asia's forex loss (and hence one off). This means that operationally, even though the associates are loss making, they are not bleeding the group in a big way.
In (a) above, I showed how the group will benefit from low fuel cost. The same should happen to all these associate companies as well. As such, in coming quarters, it is not inconceivable that associates contribution will turn positive.
3. Projection and Valuation
As usual, to determine whether Air Asia is overvalued at current price, I rely on PE multiple.
Based on 2,783 mil shares and RM1.66, Air Asia's existing market cap is RM4.6 billion. Based on 10 times PE multiple (plucked from the air), I will only feel comfortable if Air Asia can generate at least RM460 mil net profit per annum.
Is Air Asia in a position to deliver ? I constructed a simple financial model to try to gain further insight :-
To be objective, I chose not to manipulate any figures and instead let them flow naturally. Without any interference from me, the financial model churns out potential net profit of RM1.1 billion, or EPS of 40 sen for FY2016.
The figure looked staggering. Is it far fetched ? Is Icon8888 the only one that came up with such bullish projection ?
Not really, the following are recent analysts' forecast for Air Asia. Their figures are not as high as mine (probably due to more conservative assumptions regarding fuel cost). However, the projections are still way above market expectation (as reflected by latest market price) :-
(Maybank IB analyst report dated 29 February 2016, expects RM796 mil net profit this year. EPS of 28.6 sen)
(Hong Leong IB analyst report dated 29 February 2016, expects RM822 mil net profit this year, RM1.06 billion net profit next year)
(Kenanga IB analyst report dated 29 February 2016, expects RM810 mil net profit this year)
(Public IB is the most conservative. However, it is still as high as RM683 mil, or EPS of 27.6 sen)
4. Concluding Remarks
I believe the market has not fully understood the implication of Air Asia's latest turn around. Having said so, I would like to point out that RM1.1 billion net profit is aggressive and is NOT what I am targeting for in FY2016. Same as every other stock, I am only targeting 30% return for Air Asia by end 2016 (Target Price roughly RM2.20). Anything above that is bonus.
In view of the favorable balance of reward vs risk, I hereby stick my neck out to scream for Buy. Air Asia's tagline is "Now Everyone Can Fly". Mine is "Now Everyone Can Buy".
However, I am just joking when I said sell car sell house. Please buy within your means.
Last but not least, it is pointless to blame others when your investment is down. That won't help you to become a successful investor. My article should be treated as a source of information to help you to understand a stock, not a fixed deposit slip that guarantees your return.
Your money your risk your reward. Have fun.
(Icon) Air Asia (2) - Understand Its Past To Better Feel Its Future
Author: Icon8888 | Publish date: Tue, 15 Mar 2016, 12:04 PM
(Buffett was averse to airline stocks due to their low profit margin and heavy capex requirement. Will he change his mind now that oil is so cheap ?)
Executive Summary
(a) In the past few years, Air Asia has grown its fleet and revenue substantially, yet its profitability remained more or less the same. To find out why, I undertook a detailed study of the group's historical P&L.
(b) Pursuant to my analysis, high fuel cost (and the inability to pass through to passengers) is the main culprit.
(c) Current low oil price will unshackle the group, allowing it to keep price low and at the same time rake in healthy profit margin.
(d) As a conclusion, Air Asia is entering a golden era, with strong profit and potentially high dividend going forward. Maintained "Screaming Buy".
1. Introduction
Last week, after I published Part 1, many readers gave their comments. One in particular caught my attention - "Warren Buffett doesn't like airline stocks".
Without the need to cross check, I immediately know that the comment is very likely true.
This is because everybody knows that Warren Buffett likes strong free cashflow. You don't need to be an aviation expert to know that airline business is characterised by low margin and high capex. Some people describe it as "growing themselves into bankruptcy". This is the exact opposite of what Warren Buffett desires.
Is this stereotype applicable to Air Asia ? How has it performed in the past ? What actually dragged down its performance ? Are these inhibitors stil there ? Will they continue to affect the group going forward ?
2. Unpleasant Big Picture Indeed
The only way to answer those questions is to study the group's past performance.
First of all, we need to establish whether Air Asia meets Buffett's stereotype for airline companies.
Indeed, the group displayed certain characteristics of Buffett stereotype for airline companies :-
(a) Between FY2009 and FY2015 (a period of 7 years), Air Asia spent a total of RM10.7 billion on capital expenditure.
(b) The group increased its fleet size by 67% from 48 aircrafts to 80 aircrafts.
(c) In line with the fleet expansion, revenue also increased by 73% from RM3.13 billion to RM5.42 billion (I used FY2014 figure as 2015 was inflated by huge aircraft operating lease, as pointed out in my first article).
(d) Unfortunately, PBT (exlcudes exceptional items) remained stagnant throughtout the years.
(e) Net borrowings increased from RM6.85 billion to RM10.2 billion.
What had transpired ? What are the things that held back the group ?
To answer the above question, we need to take a closer look at the group's historical P&L.
The table above contains a lot of information. Unfortunately, it is a format that is not conducive for spotting patterns and trends.
It turns out that by looking at year-on-year changes, the various major factors affecting Air Asia's profitability will immediately show up.
Just in case the readers do not understand how to read the above table, let me use revenue to demonstrate. For example, the FY2010 figure of RM815 mil = FY2010 revenue - FY2009 revenue = RM3,948 mil - RM3,133 mil.
Key observations :-
(a) Between FY2009 and 2015, average revenue growth was RM492 mil per annum.
(b) Despite heavy capex, depreciation charges had not grown by much. On average, the increase was around RM70 mil per annum. Not a small number, but relatively insignificant compared to average revenue growth of RM492 mil per annum. It is not the major culprit we are looking for.
(c) The same is true for interest expenses. The group's borrowings increased by 66% from RM7.6 billion in FY2009 to RM12.6 billion in FY2015. However, net interest expenses on average increased by RM33 mil per annum only. Again, it was relatively insignificant compared to annual revenue growth of RM492 mil per annum.
(Note : Further analysis showed that the relatively small increase in interest expenses was largely due to the group's ability to lower its cost of financing from 4.9% to 4.2% over the years)
(d) The item that has the biggest negative impact on group profitability turned out to be fuel expenses. As shown in table above, during the period from FY2010 until FY2013, average increase in fuel expenses was RM321 mil per annum. This item alone knocked off 65% of the increase in revenue from capacity expansion, leaving behind only 35% to cater for increase in other expenses. After deducting all the additional expenses, there is nothing much left for shareholders.
4. The Economics Of Fuel Surcharge
In my opinion, the high fuel cost experienced by Air Asia was actually a result of competitive pressure.
The group is entitled to pass on higher fuel cost to passengers. However, due to intense competition from MAS and other low cost operators, the group absorbed the bulk of the cost increase to defend market share. During the period under review, average fare per passenger was on downward trend despite persistently high oil price.
The effects of high fuel price was particularly pronounced during the period from 2011 to 2013. Even after passing on some of the cost to passengers by way of fuel surchage, average cost per barrel was still as high as USD111 per barrel.
That was the main reason why Air Asia was not able to grow its profit despite healthy top line growth.
However, there are signs that things are improving. In the latest quarter ended 31 December 2015, average fare has increased to RM178 per passenger.
The improvement was likely due to MAS' rationalisation exercise which involved shutting down certain flight routes. The company made the following commentary in the December 2015 quarterly report :-
5. Cashflow
There are allegations that airline companies need to call on shareholders to inject capital every now and then. Is that the case for Air Asia ? Let's look at the group's historical cash flow to help us answer the question.
Key observations :-
(a) Good time or bad time, the group generated robust EBITDA of approximately RM1.5 billion per annum. I give that a big LIKE.
(b) The group spent heavily on capex (RM10.7 billion over a period of 7 years) to grow market share.
I reject the notion that the group is growing itself into bankruptcy.
As per my analysis above, profit stagnation was mostly due to high fuel cost and competitive pressure tying their hands. Now that we are entering an era of low oil price, many of the routes that previously struggled to break even should turn profitable.
On hind sight, the group has done the right thing by pushing ahead with capacity expansion in the face of high fuel cost. Without that, it won't be able to enjoy the current windfall gain brought by low oil price.
Opportunity is indeed for the prepared mind.
(c) During the period from FY2011 to 2015, the group injected RM743 mil capital into its associate companies and jointly controlled entities (Thai Air asia, Indonesia Air Asia, Philippine Air Asia, etc) by way of equity injection as well as shareholders' advances.
Apart from Thai Air Asia, the other associate companies had not performed well. However, with the current low oil price, the odds of them turning around had improved substantially. In coming quarters, we will find out whether that will indeed be the case.
(d) In FY2009, the group undertook a placement exercise involving issuance of 380 mil new shares at RM1.33 per share to raise RM500 mil. Apart from that, there is no other equity fund raising exercise. Seemed like "rights issue every now and then" is nothing more than wild talks.
(e) Not only that, Air Asia has been consistently paying out dividend since FY2011.
With prevailing low oil price and expected spike in earnings, shareholders will be looking forward to generous payout going forward. Why not ? Tony loves cash too.
Cheers.
Air Asia (3) - How Much Will It Benefit From Ringgit Appreciation ?
Author: Icon8888 | Publish date: Tue, 29 Mar 2016, 11:58 AM
According to Alliance DBS Research, more than 75% of Air Asia X's expenses are denominated in USD.
As Air Asia has same business model as AAX, I wonder whether it has a similar cost structure ? To find out how the strengthening of Ringgit will affect Air Asia, let's take a closer look at its historical P&Ls.
If I am not wrong, the yellow highlighted items should be mostly denominated in USD.
For revenue, the final quarter of aircraft operating lease was unusually high. I normalised the figure by annualising January to September 2015 figures to arrive at USD248 mil as full year estimate.
For expenses, the FY2015 fuel figure was based on USD82 per barrel. In FY2016, the likely price per barrel should be USD59 (Air Asia has hedged 50% of its requirement at that price). Based on 6.28 million barrels, fuel expense should be USD371 mil.
Based on the adjusted fuel cost, total expense would be approximately USD1.25 billion, out of which USD631 mil will be denominated in USD. This represents approximately 50% of total expenses.
However, after being offset against USD248 mil operating lease revenue, net Dollar denominated expenses is only USD383 mil, representing 30% of expenses.
To determine the impact of USD movement, I did a quick sensitivity analysis based on base case of 4.1 and USD383 mil :-
According to table above, every RM0.10 movement in RM vs USD will result in RM38 mil changes. Based on 2.783 billion shares, approximately 1.4 sen impact on EPS.
As Air Asia has same business model as AAX, I wonder whether it has a similar cost structure ? To find out how the strengthening of Ringgit will affect Air Asia, let's take a closer look at its historical P&Ls.
If I am not wrong, the yellow highlighted items should be mostly denominated in USD.
For revenue, the final quarter of aircraft operating lease was unusually high. I normalised the figure by annualising January to September 2015 figures to arrive at USD248 mil as full year estimate.
For expenses, the FY2015 fuel figure was based on USD82 per barrel. In FY2016, the likely price per barrel should be USD59 (Air Asia has hedged 50% of its requirement at that price). Based on 6.28 million barrels, fuel expense should be USD371 mil.
Based on the adjusted fuel cost, total expense would be approximately USD1.25 billion, out of which USD631 mil will be denominated in USD. This represents approximately 50% of total expenses.
However, after being offset against USD248 mil operating lease revenue, net Dollar denominated expenses is only USD383 mil, representing 30% of expenses.
To determine the impact of USD movement, I did a quick sensitivity analysis based on base case of 4.1 and USD383 mil :-
According to table above, every RM0.10 movement in RM vs USD will result in RM38 mil changes. Based on 2.783 billion shares, approximately 1.4 sen impact on EPS.
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