Why Airasia is winning its local fight and that's hugely important

I have not written on Airasia for a long while, as over the last 18 months, its business has taken a strategic operational direction change. The group has moved into not owning its planes largely, getting hugely aggressive in its digital initiatives. I have to admit, it is hard to measure its digital initiatives when in the market we have Grab which was valued at $14 billion while Airasia as a whole is barely $1.5 billion.

At the same time, Airasia which is operating in markets such as Malaysia, Indonesia, Thailand, Philippined, India and Japan is growing aggressive. By not owning planes, it has rooms to grow more aggressively as long as it can keep its operational cashflow strong. This is what Airasia has been able to do despite growing strong. As an example, its operational cashflow for last 2 quarters combined was RM1.252 billion. Assuming it can keep up to the trend, the business is operating at close to 3x Price / EBIDA or Price / Operational Cashflow.

Without the high spending on capital expenditure as it now do not buy planes, the price it is trading at is hugely attractive. As a result, I am not sure why most analysts are putting down the price of the company.

Airasia's biggest tradeoff actually is the weak Asian currency (except for Thai Baht) as its leasing and fuel costs are in USD. The good part is that all its competitors are facing the same situation. Scoot, one of its closest competitor may have a slight advantage as SGD seems to be stronger and its parent flies globally where it can earn USD and Euro.

However, those are not the biggest factor to Airasia. I seem to think that Airasia, with its management can control its ownself if it is operating in an environment that is based on free competition i.e. open skies. Airasia, unfortunately is not operating in this environment. To sum up its founder closely, Airasia is operating in a hugely regulated environment. To make matters worse, the airports operations in this region is largely monopolised and regulated.

In the past, and up until today, Airasia's largest base is KLIA2 and it is not getting the support from its airport partner. If I am a Tesco, and I rent 95% of the space and bring 97% of the traffic to my property owner. However, I am consistently in dispute with my owner, how would investors think. My owner consistently would like to increase my fees. I have no other options as airport operations license is given to only one operator.

Even then, I am still able to turn a decent profit. We have MAVCOM which was created in 2015 and it seems to think Airasia's business concept is the same as other airlines. MAHB seems to be able to understand Outlet Mall concept as it ties up with Mitsui to operate one, but when comes to airports it is not able to think so. Emirates and Qatar Airlines does not mind paying for a premium service equivalent airport, but Airasia does not mind the no-frills airport. The food outlets are the added convenience - not as a mean to attract traffic. This thinking is conveniently ignored by MAHB.

The National Transport Plan is working to readdress the situation. It is recognizing the impact of a low frills airline and has plans to consolidate the regulators i.e. Civil Aviation Authority of Malaysia (CAAM) and MAVCOM.

Hopefully that is a beginning for a locally developed airline that one that is able to expand overseas to have a good local base. Just like many huge international companies getting their government to support them in their own countries so that they are strong enough to grow beyond its home.

One can see that Maybank analyst is targeting Airasia

There is definitely going to be impact onto aviation business with the introduction of levy for travellers by government, RM20 for ASEAN and RM40 for non-ASEAN. Local travelling, there will still be no levy.

However, in reading the release here by Maybank, I think the opinion is wrong. How can Airasia and Airasia-X be impacted while MAHB is not impacted?

MAHB's revenue is dependent on passenger traffic. If ever, MAHB is more affected than Airasia's revenue is only about 30% from Malaysia, whereas MAHB's bulk of revenue is on passenger traffic.

His analysis is wrong.


Part of the article from STAR is below:

Maybank Research said the departure levy will negatively impact AirAsia and AirAsia X’s passenger load as their passengers are perceived to be price sensitive. 

Historical accounts are mixed regarding the impact of tax hikes on air travel; in Europe, it caused a multi-year traffic decline while in Hong Kong and Singapore, it merely reduced the traffic growth momentum ever so slightly. 

“The jury is not yet out whether the departure levy will kill passenger demand,” it said.

Maybank Research said the tax burden for international air travel will rise by 49% (within Asean) and 51% (outside Asean). 

MAHB is largely unaffected but it is negative for airlines. 

How to not miss the Airasia's 2017 AGM

If one is not able to make it to the AGM which happens to be held in a far away land in Sepang where it is some 90km from heart of KL, do spend 22 minutes to watch this IR video. Believe me, you will not miss much.

Basically, during the AGM which covered more than 150 minutes, Tony Fernandes presented the strategy of the company and the bulk of his presentation was spent on its digital strategy. He went on to say that analysts until today do not know how to value Airasia while he deemed the company to be more of a digital company than an airline company. Or at least he wants people (especially investors) to deem it that way.

For me, as an investor, basically I want to put a message that in buying Airasia, one is buying into a company which really has strong substance (with good profits) and it has game plan which will put the company into becoming more than an airline  for the next 10 years.

(Despite painting the plane blue in one instance), Tony I can say is ahead of its time when coming to do with strategy for its group.

Normally, for any thriving or not so thriving airline, it will try to find disruption points and react to it. Airasia is trying to be the disruptor. It is not looking at just being an airline but it also looks at the tourism and even e-payment industry. Through its platform, it goes into the business where Expedia is in. It goes after Alipay. But in other ways, it also complements Expedia, Airbnb. Think of this, while Jack Ma manages to convince people that Alipay is potentially bigger than Alibaba, and raising funds to that value, it is not that crazy to pursue Airasia in that manner. In most areas, it does not compete against Alibaba but in areas on digital payment, e-commerce it may be.

Many companies which are burning money such as Grab, GoJek are moving into adjacent areas such as e-wallet, delivery service and they are today valued at much higher valuation than Airasia. Grab was just valued at USD10 billion by Toyota while Airasia is valued at RM10 billion from its market cap.

Even among its peers (VietJet, SIA etc) in the airline business, Airasia is much lesser valued.

Do watch through the video, and think and compare against other companies of today.

Interview with CEO of MAS

Please click on the short 10 min video which was an interview by TheEdge (Nadia Hassan) and the CEO of MAS.

http://www.dailymotion.com/video/x5boqns_talking-edge-malaysia-airlines-stumbles-and-soars_news#tab_embed

To understand Airasia's competition (Why Airasia? Because I own its shares and also MAS is not listed), one has to know where MAS is heading. The below video shows that MAS is not going to fight on price anymore as opposed to previously. This is bad for me as a consumer but good for me as an investor. I remember I took a lot of Firefly flights between Penang - Subang at RM39 - RM45. Those tickets are not available anymore despite fuel price still cheaper (than 2 years ago).

MAS is now acting just like a full-fledged airline - they should as they do sometimes have a captive market - i.e. government employees (Yes, Govt employees usually take MAS as compared to Airasia). Additionally, since MAS has its own plan of getting to profitability (presuming it is going into the IPO market by 2019), it will have to be more discipline in pricing its tickets. It will be much less getting into price war - which is good for the airlines generally. Yes, MAS is also much tighter in terms of its costs structure - but generally from the interview you would notice that Airasia has a much earlier headstart as it was able to have better and proper planning against MAS which was struggling for a long while.

Also, I would like to highlight although people would have thought that Malindo is a major competitor to Airasia, it is not actually. Malindo gets its planes from Batik Air (owned by LionAir) which is a full fledged airline in Indonesia. You would have noticed that Malindo sells business class seats (and has IPTV screen) compared to Airasia which does not. Hence the costs and pricing structure are different. This makes what Tony Fernandes says i.e. Malindo is more of a competitor to MAS than Airasia is somewhat true.

Decline of full fledged airlines in Asia

I think this article is written by the same writer which I rebutted last few months on Airasia. Some of the writings are very true, some are to attract readerships.

Click to Enlarge

Generally, the landscape has been changing and people are taking planes being part of their occasional travel rather than it is a luxury. For the budget airlines, I am not that worried on the Middle Eastern airlines (like Emirates, Qatar, Etihad etc) in the long term. What I am more worried of are the Chinese airlines. The Chinese have the tendencies to throw prices with no fear over losses as the government tend to provide subsidies over areas that they want to support.
So far, I have yet to see Chinese government putting extra support over this but if it does, the other budget airlines - Airasia included should be wary.

This is what the Trump's government has been against - subsidies and China likes to do subsidies in areas which they are fighting hard for.

A different airline industry in 10 years time

This came out from Thestar yesterday. Alternatively, one can also read from below.

Come to think of it, it may not be far off from what I have been prophesying. I may not be from the airline industry, however if we do look at the trend of several of other industries that have gone really global, it is definitely coming. Of course, there are some who says that I should not be taking examples from Europe and bring them here as it if it is going to happen the same.

It may not be entirely the same but in fact things may happen even faster, whether the government of each countries like it or not.

In the end of my article, I had a bold statement where I said, I believe Airasia will one day be a $10 billion company - in 10 to 20 years time. It is not arrogance or crazy but already in the works of the Airasia group if you between the lines what they are trying to do.

They are trying to consolidate the entire group and hence make the company as 1 single company for transaction. By doing that, Airasia is no longer a Malaysian or Thai company. Of course he is trying to say it is an ASEAN company, but I think it is even bigger looking at the moves that it has gone to Japan and India. Airasia is even talking to partner in China.

In fact, the airline industry in Asia is slow to change and adapt. Still every country is trying to defend. There will be consolidation and merger will happen. The smaller airline will not be able to survive as they are just too small.

What I think of the recent run in Airasia and AAX

Recently, both stocks have been largely traded so much so they have become speculative in nature. That's not good as I was hoping for much less speculation as it would probably allow these stocks to be traded closer to its actual value. Of course in terms of performance, in the eyes of most shareholders, Airasia had turned around while AAX for many quarters of losses (8, I believe), this is the first quarter which it has recorded a profit. As I have highlighted before, they in fact were already signs of improvements few quarters ago. You can read them here, here, here and here. But most people just looked at the last line i.e. PAT.

I have written a lot about both companies (Airasia especially), even promoting the stock as I have thought that there are never such opportunities that comes along that often. Usually when a stock has gone down significantly, they are either facing huge cashflow problems so much so one will need to understand in detail the works of the business or fundamentally have they really deteriorated (example some of the oil and gas services companies today)? In the case of Airasia, it is not so. Some harped on the huge debt in the balance sheet. Agreed, but what's clear is that the company is generating significant cashflow from operations (to more than cover those debts) and the stocks were traded at such a huge discount. So, am I buying cheap or am I buying great companies. Cheap - yes. Great companies - more like good company with room for improvement but in a competitive industry.

Both Airasia and AAX have still some areas to improve - such as make sure the balance sheet are stronger and for Airasia, making sure some of the operations such as Philippines and Indonesia to turnaround fast.

I am hoping and forecasting that these 2 stocks to perform even better in the next 2 quarters at least (due to the lower oil prices which are to be even better felt now - 2016), but one should look at the fundamentals in the long term. The fact of the matter is that to be great, Airasia (especially) needs to continue to invest. It is in a growth space in a seemingly mature industry. The mature players (SIA, Thai Airways, Qantas) are grappling with competitors whom have newer style of doing business and to a large extent, many governments or airports have changed to suit the market conditions. An example, Bangkok reinvested into the older airport (Don Muang) and turned it into a hub for low costs carriers. Malaysia has KLIA2. Singapore's Changi did something as well. Add on to that, the Malaysian government has implemented e-visa for Chinese nationals - all these are done for better travelling experience and they help Airasia and AAX.

Aren't those calls for continued reinvestments. If one does not invest and stay within their own countries only, they are calling for trouble. The fact is that Asia and larger extent ASEAN is so much interconnected that no low costs airline can just operate within its own country.

From this, I would expect Airasia to face turbulence still in its growth path but it is necessary. Every single investments into a new country will need many years to achieve first time profitability. And look at it, Airasia has still to see profits in Indonesia, Philippines, India, Japan and it is talking of going to Vietnam as well.

Yes, the recent drop in oil price and more mature and older traditional airlines coming to their senses that they cannot rely on their government to continue to rescue them allow Airasia to speed up the process of its continuous investments. This is a big plus in considering in the purchasing of this stock - not whether they can reach RM2.00 by next week.

About Airasia

Before one have negative thoughts on Airasia's operations, lets see some of its perspectives.

1. It is the largest low costs airline in Asia, yes?
2. Who in the region is its largest competitor? Lion Air? SIA's bunch of holdings - Scoot, Tiger etc? Why would SIA be interested in a low costs carrier, anyhow?
3. Who else is able to have partnerships in and multiple hubs in other countries besides Malaysia? Airasia has Thailand, Indonesia, Philippines, India. 
4. Name one business which will make tonnes of money from year one of operations. On this think of Indonesia and Philippines. Is Indonesia esp. a key operations hub for Airasia. If yes, is it important for Airasia to focus on its operations there?
5. Airline is a tough business. True especially for many American airlines and some national airlines, but some low costs do very well. Check out Southwest, Ryanair, Easyjet.
6. Is Asia a key growth area for many suitors? Think strategic investors. If no, why did Heineken, (was it) bid extensively for F&N's brewery in Singapore? Why does AEON look at SEA as a key investment destination?
7. Is there stronger growth in Europe and North America than Asia (especially South East and East Asia)?
8. Is Airasia better off today than it was say 3 - 5 years ago? Lower oil price (What's the impact of Iran on the price of oil in the future?). Airasia today with better reach. More key partnerships. These are progress. No?
9. MAS comes to its senses? It needs to turn profitable, now - remember MAS was losing a billion ringgit a year.
10. Is its current price lowest ever for a long long time?

Has Airasia X actually improved?

The performance of Airasia X or even Airasia for that matter is very much dependent on the following factors:

• fuel costs;
• load factor i.e. what is the occupancy if I own a hotel; and 
• average revenue per passenger.

It is a no-brainer for Airasia to be performing, ideally fuel costs has to be low, load factor high and of course average revenue per user should be high as well - the higher the better. This is not to say that other costs factor are not important but they are much more manageable. Typically, if one is to do a lot of promotion, average revenue would probably deteriorate while load factor would have improved, and vice versa. Hence, a good strategy would be finding a good balance - good load factor while not sacrificing on average revenue.

In accounting sense however, there is one factor that may also provide a huge variance - forex loss or gain. Just look at the forex loss or gain over the last 7 quarters. Why is the forex changes impacting it so much? Because a large costs including borrowing factor for Airasia X is in USD. In essence, the weaker its revenue based currency against USD, the worse off it would have been - i.e. Ringgit Malaysia against USD. This is basically what Airasia X was against in the past 2 quarters.

income statement for Airasia X over last 7 quarters

If I were to compare the performance over the last 7 quarters against its performance prior to IPO, I would say it has deteriorated after its IPO, but has actually improved in its recent quarters. It actually registered operating losses between 4Q13 to 3Q14 (over 4 quarters) which is a big NO. And for the last 2 quarters, that turned by it posting operating profit and that actually (I would say) improved in the most recent quarter despite the low load factor (74%) due to low advertising effort after the crash of one of its plane in Indonesia in December 2014. One should notice that the higher operating profit in 4Q14 was mainly due to much higher other income (mainly sale of aircraft and others).

Hence, in terms of operating performance, on the overall I would say Airasia X has improved despite some forex challenges that affects its financial performance. For Airasia X to be fully profitable for the year, I think it also depends on how it executes to improve its load factor while maintaining its average revenue per passenger as well as hoping that Malaysian Ringgit does not depreciate further. Lower fuel costs over the long term is also very important towards its performance.

It is however good to see that its performance in reality has actually improved as we do need a second local long and medium haul player despite the challenges.

The power of Tony Fernandes's brand

On a holiday, I was watching CNBC Europe yesterday and what CNBC had was a 15 minutes interview with Tony Fernandes. They were not just talking about Airasia and Airasia X as well as the challenges that his airlines are facing but also QPR.

What strikes me about the interview with Tony was that, unlike some other interviews, CNBC Europe was pre-empting viewers (for some 2 hours) that Tony was to be part of the show for the day which made me stayed on to watch. Like I said, it ended up as only a 15 minutes interview - maybe less even.

Now - let's think it over - Airasia is not even a part of Europe nowadays. It does not fly to Europe anymore. He is part owner of QPR and QPR is not even a Premier League team now. But what makes CNBC pre-empting its viewers for some 2 hours not letting us know at what time the interview was supposed to happen? Tony Fernandes is a big brand himself even in Europe.

One may or may not support Airasia - due to several things that it made to its consumers - like charging for almost anything, but as a Malaysian ain't we proud that we have someone like him?

How do we leverage on his brand? How does Malaysia support him rather fight him? We embraced lesser stars aren't we? - Jimmy Choo (whom does not own the Jimmy Choo brand anymore) and Michelle Yeoh and her husband (not a Malaysian), even.

I have been on local flights every week nowadays - and the thing that strikes me is that airfares price competition has gone to quite ridiculous stage. I like it, as it allows me to buy cheap flight tickets, but I also know that it probably will not last - got to enjoy it while I can.

While I know Airasia is one of the brands controlled by Malaysians and made it big by Malaysians is facing lots of challenges from the likes of Malindo and MAS - we know that the current situation will not last. We should not give in to Tony Fernandez and his group with a silver platter. He is a furious fighter. What Airasia has is scale, speed and sourcing. If Malaysia does not turn out well for Airasia, it has the ability to move beyond Malaysia. Not MAS.

But we are using taxpayers money (for MAS especially) to fight on something which you know MAS will lose without the support of government's money. Malindo is facing the same thing. I do not know who owns the 51% of Malindo (except that it is NADI - and who is behind NADI?) and I like the price competition but not the way it is fought.

We are just fighting a war which all will lose. Consumers win for now - but somehow or rather it is very short term. What we need is a major revamp in terms of cost structure for MAS, not giving extra privilege to Malindo whom is allowed landing in Subang but not Airasia. Not the way the war is fought currently.

You can watch his interview with CNBC Europe here.

Airasia: Is this the beginning of its deterioration

I always believe that co-operation between government and private has to have both parties playing to the tunes. Malays have this saying that "you need both sides of your hands to clap. A single side does not clap itself." The fact that Airasia has a change in its management structure shows that something had to be done internally and there could be things that we do not know.

The fact that now the liaison chief has to appear and apologise so soon shows that one side is so powerful and the other probably has to obey. I mean what did the Airasia X's CEO said that caused him to be needing to apologise. And worse still, the apology is on another person's behave - unbelievable. It is like you work for your company and out of principle, you refuse to apologize due to something which you yourself believe is not wrong and forced to say sorry - you refuse to and your boss is doing it on your behalf. Let me know, how you feel.

I never know that Tony Fernandez as a CEO would succumb to such a low especially after the "Apprentice" thingy. Now, Airasia is a very respectable company due to the things that it had done. It has helped to increase the revenue of Malaysia Airport substantially. Without Airasia, KLIA2 may not be needed. Without Airasia, there may not be another Malindo. Without Airasia, many travellers would still be travelling at a much premium prices and agreeing to Ling Liong Sik's remark of MAS international routes subsidizing the local routes. Without Airasia, many budget travellers may not use KL as the transit and perhaps not spend that money in Malaysia. Without Airasia, many more would not be hired. With Airasia, our income from tourists probably increased. With Airasia, many more travelled. With Airasia, more potential businesses made happened.

So what is the problem with Airasia? Yes, it may be cocky at times, but still the benefits that Airasia had created... Business is business. Airasia needs to be profitable, squeezed the hell out of its suppliers, customers but still people use them. It is judged by its performance but not needing to succumb to such a lowly behavior. If Airasia feels that it need not advertise with Utusan, what's wrong with that?

I see CIMB smartly advertises with Malaysiakini. Because they have done their homework on who reads what. Who are their target market.

After all these, I am still sad to see that it needs to apologize. For business that is...but what about the benefits it has brought?

Stabilizing action on Airasia X

I have been looking at the stabilizing action as made on Airasia X's stock price. Stabilizing action or green shoe option has been made on the shares for almost everyday since its listing date. Stocks have been purchased at RM1.25 for it not to drop below the IPO listed price.

Airasia X's stock is not that bad, but it is not just worth the price it is listed for. I do not know how much it is worth, BUT I AM WONDERING WHY NOT LET THE MARKET DECIDE.

A stabilizing action can actually causes fear among the shareholders as the share price is deemed as not true worth of what its underlying value is - hence probably more selling.

And in the future, for any IPO per se, let's not overprice the initial offer. The recent large IPOs, we have seen the shareholders have sort of become greedy and think that their share price can do wonders.

IPOs (which are sort of new kids on the block) should not do wonders as they have yet to prove their performance consistencies in the market. If the company is beautiful, overtime its stocks price and financial performance would show. But to expect immediate results from selling expensive is not the way.

Between Airasia X and Astro's IPO

This morning while I was listening to BFM, it was talking about Airasia X's IPO opening which needed Maybank to stabilize the price to prevent it from dropping below its initial offer price. The station mentioned of it being the worst performing IPO in recent times. I think that's not true. Probably if we take into account not so long ago last year, perhaps Astro was worse dropping below RM3 for a long long while.

The difference between Airasia X and Astro. Well, if you give me the choice, I would take Airasia X despite both businesses needed huge capital outlay. Airasia X is looking towards growth prospects although the challenges are aplenty while Astro is looking towards a more bleak outlook having gone through maturity stage years ago and now fighting older age. It is fighting against something which it cannot fight - not ABN or RTM - but the internet.

One of the reason why the investment community are not favorable towards both IPOs are due to the pricing. They are just pushing the envelope. If you noticed, the more recent large IPOs are just too expensive for investors and the launching price just do not makes sense. IHH, FGV included but of course these two have big brother to support and make them look good but Airasia X (which remain to be seen as it is just 2 days) and Astro do not have that big brother.

Why Airasia X may not be an Airasia

For this article, I am not going to compare financial numbers but would look at in terms of size for each of the company. Airasia X (“AAX”) has just been provided a valuation of RM1.98 billion at RM1.25 per share, hence effectively valuing AAX at a post IPO valuation of RM2.9629 billion of its enlarged share capital.

Now in comparison, let’s look at Airasia. At today’s price of RM3.07 Airasia has a valuation of RM8.5 billion. For the matter, Airasia is going to be 2.5x larger than AAX in terms of market valuation. Airasia has established operations in Malaysia, Thailand, a growing Indonesia and seemed to have sorted out for a good start for India. 

The reason I like Airasia is due to it having a business model that can replicate as long as it manages well in the countries it operates in. Future looks bright for the company with its dominance in the low cost airline business in Asia. One would consider the attractiveness of the growing middle class in Asia to be able to comprehend what’s the outlook for Airasia.

It has the strength, advantage and capabilities of raising funds as opposed to many other of its competitors. This portion of Airasia’s strength should not be underestimated as airline is a hugely difficult business when comes to funding. Airasia is less of that, now as it seems.

Replicating that to AAX? Yes, the brand of Tony Fernandez, the Airasia model seems to be able to cause the take-off of AAX in a much less strenuous manner if one is to start off a low-costs longer haul airline. But yet, it can still be an arduous task. Airasia is a very much a strong local flight operator although a lot of its flights are still inter-country. Inter cities within the country is very lucrative. 

AAX model, on the other hand is entirely inter-country unless one can think of more than 4 hour flight between India’s cities or Australian cities.

Business model

AAX on the other hand is still sorting out its business model with flights now flying off from Malaysia to other destinations beyond the 4 hours threshold. It has changed from a long-haul operator to now calling itself a medium haul operator, flying to destinations like Melbourne, Sydney, Taipei, Tokyo, some cities in China, Jeddah etc.

There are a lot of cities that one can go to but yet for one to take a long haul flight, many factors have to be taken into – comfort, competition (which in this case is way more competitive due to many locally owned national airlines). I provide a scenario of KLM, the Dutch operator – for its flight to Australia for example, it can provide a very competitive rate for those stopover flight in Kuala Lumpur as it has already have a large portion of its plane filled from Europe. This is going to be in competition to AAX. In terms of comfort between AAX and KLM for example, there is a significant difference especially for an 8-hour flight.

Another  thing on competition – SIA for example can allow its market share for shorter haul flight to be lost, but it will never allow its market share for longer haul flight to be greatly affected. Business is about changing to the landscape of competition. If for a short period, SIA, Qantas can afford to lose out, but in the longer run it will not and these are national airlines we are talking about.

These are the things you will see happening to AAX as compared to Airasia which has put itself in a much better situation as compared to its sister company.

Update on Airasia X's IPO

My previous article on the Airasia X's IPO was 6 months ago and it was based on its draft prospectus. I felt that it is injustice to the company if I do not update some of the details. The pricing is in fact even more bullish now than when I wrote the paper. It is now pricing the IPO at RM1.45, hence valuing the company at RM3.437 billion post IPO.

The amount to be raised is RM1.146 billion with RM286 million going to the selling shareholders.

Airasia X will now use 33.3% of its proceeds for repayment of bank borrowings. Others are for capital expenditure, working capital and listing expenses.

Now straight to the valuation. Obviously, after the December numbers, Airasia X has its financials updated. For FY2012, it registered a PBT of RM38 million. After stripping out the forex gain though, it was still registering losses. First quarter 2013, it registered a PBT of RM34.8 million. Assuming a full year 2013 annualised numbers, that may exceed RM150 million (assuming it reduces its financing costs and growth).

With the profitability, the valuation seems to be lower although it could still be at a high twenties PE or even 30x. Do note that I used PBT because the add back on deferred taxation is misleading .

Now the thing about this IPO is that it is a company which attracts global attention. The high valuation has been the same on IHH and it does not seem to deter these international guys to take a stake in the company. The original thought that retail portion is going to be bigger is not true - that actually surprised me when I heard it. Institutional portion is still 22.7% as compared to retail portion of 10.6%.

I do not invest in a company with such valuation, but again Airasia X is a growth company. It will be using up more cash as it is a capex heavy business, but one should not fight the attractiveness part of the brand and guys who are selling the IPO.

Other related article:
Why Airasia X may not be Airasia

I think I'll say "X" to AirAsia X's IPO

The draft to SC just published. I had a quick view to see how this low-cost long haul airline is doing and for the IPO, would it be attractive. Let me provide some of the numbers which I have captured.

Still loss making despite profits in FY2010. Seems like FY2012 will not be a good year either. Note the deferred taxation in earlier years of FY2009 and FY2010

Notice the tapering off in revenue especially for FY2012. This could be perhaps due to the moving of routes from London, Paris, Christchurch to other shorter lower priced destinations like Sydney, Osaka and Beijing. It seems that competition is different for Airasia X. Airasia, the parent had a good headstart of competing against a poorer and weaker MAS. However, probably for the long haul, competition is different. It could be against many other airlines which uses Malaysia as hub. They could also be of much stronger competitors as compared to MAS. AirAsia X additionally could be selling more discounted price seats as compared to short haul flights.

One example, anyone who flies to Sydney, may opt for connecting via Singapore and uses SIA. In a short haul flight, if I am to fly to Bangkok, my options are lesser. No stopover for sure, hence the short haul Airasia is a very good point to point airline. In a short haul flight, a 30% lower in air-ticket price is an important decision making factor for someone to choose.

For a longer haul flight, it will be harder for AirAsia X to reduce costs as the major cost, it seems is fuel costs - up to 60%, which is a major problem for a low costs airline as it is much harder to reduce that part of the costs. Ancillary revenue does not seem to be a major factor than I thought it would. As much as Airasia X is trying to sell the extras, I think it does not translate to enough income yet for it to turn into good profits.

On its major costs, See below.

Balance Sheet

For Airasia X's balance sheet, it will be looking for immediate cash (similar to the IHH's IPO symptom) to beef up its balance sheet. In fact, more than 55% of the funds to be raised will be for debt repayment. Also look at the cash level. Remember, a huge sum of Airasia's model is based on early cash collection. Hence, it is collecting upfront ahead of its flights which would be scheduled later on. Look at the accounts payable as well as sales in advance figure (a whopping RM271.5 million against cash of just RM24.8 million as at 30 June 2012). Those upfront collected cash are parked under the sales in advance until the flights take off. The more it is in this situation, the more dire it needs to sell early and at very cheap price.

AirAsia X's Balance Sheet is obviously not strong which is why it needs funds quick. Look at the cash level while long term debt is almost RM1 billion.

Shares on offer

AirAsia X is offering 790,123,500 shares out of which 197,530,900 are offer shares from current shareholders. According to reports from Bernama via MalaysianInsider.com, it is trying to raise RM760 million. An updated report says that Airasia X is trying to price the shares at between RM1.20 to RM1.40. Assuming it is priced at the low end of RM1.20, hence could potentially be valuing AirAsia X a whopping RM2.844 billion. That's very expensive for an airlines which is still small although riding on Airasia's branding.

Enlarged share capital upon listing

As in other IPOs of recent, the shares are being offered to again mostly institutions. There are only 3% on offer to retail investors. After Astro's IPO which I think most of them are still underwater, I wonder how many will pick up - especially the MITI's portion. Hence, people will learn that there are no free lunches in IPOs.

With the limited routes and just 11 planes in the balance sheet, I think I'll give this a pass especially with the assumingly high price for still a loss making company.

Purchased aircraft

For any potential investors, it is a high price for purchasing hope. From here, I can say that a low costs long haul may be a different ball game. I like Airasia, but not this one although I myself like the cheap flights.

For update on Airasia X's IPO, please read here.