Fashion
AirAsia Bhd has been facing strong headwinds lately. The budget carrier’s share price has been on a roller-coaster ride over the past couple of months, fluctuating dramatically.
The airline’s shares have been under pressure for some time and plunged to 78 sen on Aug 26. Its share price has since rebounded sharply from that recent low, with analysts calling it an overshooting of its price during the selldown. AirAsia became a penny stock at the end of last month and stayed below the RM1 mark for about two weeks. Its share price has since rebounded, closing at RM1.31 yesterday.
Year to date the counter has lost more than 50%.
What triggered the quick recovery?
Analysts say the recent selldown was overdone and the market has ignored the significant value of its portfolio comprising non-airline businesses within the group. In addition, they note that AirAsia’s fundamentals are intact and it is undervalued.
Maybank Investment Bank Bhd analyst Mohshin Aziz concurs that the selldown was overdone and maintains a “buy” call on AirAsia with a target price of RM2.05.
“It is a highly beaten down stock. Given the situation, it is the highest candidate (to be picked up by investors),” he tells StarBizWeek.
Mohshin notes that AirAsia has been very active this year engaging the investment community by having meetings, teleconferences and so forth but to no avail as it shares continued to be beaten.
“AirAsia is cheap. Cheapest in its history in US dollar terms and also the cheapest airline stock in the world currently,” he says.
Mohshin says there is no point talking about valuations of AirAsia, as it is beyond fire sale.
“We derived an alternative and tangible valuation methodology for AirAsia, given that the conventional ones are gaining no traction. We took the latest available appraised value of its fleet, net off its long-term debt and times it by the ringgit at RM4.3 to the dollar and we get an intrinsic value of RM1.34 per share. Basically, the metal value of the business is higher than the current market capitalisation.
“Shareholders can make a nice 18% gain by just selling off the fleet whilst keeping the RM4.8bil of equity,” he remarks.
It is worth noting that the US-based Wellington group of companies which had reduced their stakes in the low-cost carrier in June this year have started buying shares in AirAsia.
According to the latest filings with Bursa Malaysia, Wellington Management International Ltd has 200.74 million shares, or 7.214% stake in AirAsia. Wellington Management Global Holdings Ltd has an indirect 228.19 million shares or 8.2% stake, while Wellington Group Holdings LLP has an indirect 278.99 million or 10.025% stake.
The Employees Provident Fund (EPF) had on Sept 3 acquired 2.498 million shares in AirAsia but it disposed 892,500 on Sept 9.
“AirAsia took a beating but it is now a V-shape recovery. Wellington and EPF are back. They have been buying and hopefully the worst is behind for AirAsia. The counter has been attracting high trading volume,” an analyst say.
The turbulence comes not in just its shares being sold down. AirAsia is also battling with other issues such as the report by accounting research firm GMT Research that raised questions about related party transactions. GMT Research had highlighted problems with the company’s accounting practices and raised concerns regarding the firm’s cash flow, leverage and group structure.
News that PT Indonesia AirAsia (IAA) may be shut down by the end of July also caused a panic among investors.
AirAsia’s 49%-affiliate IAA has received a letter from Indonesia’s Transport Ministry laying out terms for it to ensure a positive equity position by July 31.
Indonesia’s Transport Ministry has ordered 13 airlines to raise funds to reach positive equity positions out of concerns that a negative equity would affect safety oversight.
Futhermore, the company’s latest quarterly results provided little cheer to investors. In the first six months to June 30, AirAsia’s net profit fell to RM392.36 mil from RM506.87 mil a year ago, with a relatively flat revenue of RM2.6bil.
AirAsia is also battling the Malaysia Airport Holdings Bhd (MAHB) over its operations at KLIA2. It was reported that AirAsia and MAHB would be having a “peace dinner” at the end of the month to resolve their disputes.
Analysts, however, are not too optimistic that their differences could be resolved over a dinner. “One dinner cannot bury the hatchet. We will just have to wait and see,” one analyst says.
Analysts believe that another concern weighing down AirAsia is the continued weakening of the ringgit against the strong greenback as about 70% of operating expenses and 80% of debt are US dollar-denominated. So far this year, ringgit has weakened by about 20% year-to-date.
“We believe that one overhang over AirAsia’s share price performance year-to-date is the weakening of the ringgit against the US dollar.
“We estimate that 64% of operating expenses (jet fuel, MRO and aircraft leasing) are US dollar denominated. As 8% of operating costs are hedged to reduce the impact from US dollar over ringgit volatility, the impact of every 5% drop in the ringgit equals to an increase in operating cost by 3%. Separately, 73% of its US dollar borrowings are hedged,” MIDF Research says.
At 50%, jet fuel constitutes the largest operating cost component for AirAsia.
AirAsia’s exposure to spot jet fuel is 49% in fourth quarter 2015 (51% hedged) and 100% in FY16 (fully unhedged). Thus, the impact on a 5% drop in jet fuel price reduces operating cost by 1.2% in fourth quarter 2015 and 2.5% in FY16.
MIDF Research also notes that daily short value on AirAsia has reduced from a daily average of RM706,000 in the first week of September to RM335,000 in the second week of September.
“This is also a major improvement from RM1mil to RM2mil average seen in previous months. We also believe that short sellers have been covering their positions by buying back the stock as share price rose 60% off its 77 sen low, typical in a short-squeeze situation,” it says.
