Thursday, September 17, 2009
AirAsia, Well Managed But Just Not Time To Buy Yet
The move to raise funds by AirAsia was anticipated. Why am I not terribly excited with AirAsia for now? I have to say it is a highly attractive business model, and is establishing itself as the numero uno player in Asia-Pacific region for low cost carriers.
The success of Ryan Air and the likes have attracted a lot of European institutional investors being very keen on AirAsia. Following the placement, the foreign shareholding level is about toppish, where will the follow on buying come from?
Yes the move will reduce its net gearing from 3.5x to 2.5x but on the same note it is delaying delivery of 8 planes. The biggest nullifier for me is the volatile fuel prices - no one can feel thoroughly comfortable to invest in AirAsia not knowing how that will play out. Whether they hedge or don't hedge, its a big unknown every quarter.
While I can criticise that aspect, I don't really have an answer on how to better do things. The capex will still be heavy over the next 2 years and the major carriers are cutting at AirAsia's pricing game plan as well - so many uncertainties, not my cup of tea for now. But its a well managed company, just don't like some of the factors affecting the low cost carriers industry.
FinanceAsia: Low-cost carrier AirAsia Berhad yesterday raised M$505 million ($144 million) through a fully marketed follow-on. The deal ended a little smaller than originally intended after it ran into restrictions regulating the foreign ownership of airlines. The base deal size was 400 million new ordinary shares, offered at a price between M$1.33 and M$1.40 apiece, which translates into a discount of 0.7% to 5.7% versus Monday's closing price of M$1.41. The deal priced at the bottom, M$1.33, giving the full 5.7% discount. There was also an upsize option which could have increased the deal size by 75 million shares. Fully exercised, the 475 million shares could have raised as much as $180 million, based on the bottom-end pricing. However, the final deal size consisted of just 380 million shares. The decline was a result of Malaysian regulations limiting the foreign ownership of local airlines. The deal size was therefore constrained by the strength of the domestic demand. So even though the overall demand was enough to cover the base deal, the low level of domestic demand meant that it was not possible to do so in a way that did not cross the foreign ownership threshold. As such, the order book tells two different stories. Domestic demand was centred around a few large orders, which is not surprising considering that Malaysia has a relatively small number of institutional investors. Demand from international investors, however, was much stronger, with UK investors in particular putting in some sizable orders. There was also interest from a big name out of the US alongside some Hong Kong investors. The 34 accounts that did participate were confident that Air Asia's share price has not already peaked, even though it is up nearly 60% so far this year. The follow-on did not come as a surprise; the company flagged a placement of up to 20% of its issued share capital in June and provided further details in early August. There was a marketing roadshow in the first week of September and shareholders approved the capital raising on September 10. The deal launched on Monday evening. The company intends to use the capital to pay off debt and for working capital requirements, according to a term sheet. A research report by RHB Research early last month estimated that the placement could reduce the company's net gearing to 2.54 times from 3.71 times. Correspondingly, net debt will fall to M$6.11 billion from M$6.71 billion. In mid-June, AirAsia announced strong results for the second quarter. Profit before tax of M$128 million was way above analyst estimates and a massive improvement on the M$1.5 billion loss in the same period of 2008. "AirAsia is one of the few airlines in the region to post profits in the second quarter without the aid of fuel hedging or currency gains," Merrill Lynch said a report. "Its efforts to build high-margin ancillary revenues are having a significant impact on the bottom line, as is the focusing of its growth on major markets, like Singapore and Hong Kong, against weakened competitors." In response to the strong second quarter results, Merrill put a "buy" rating on the stock, with a target price of between M$1.75 and M$1.95 a share. AirAsia is Southeast Asia's largest low-cost carrier. Its focus is on short-haul, point-to-point domestic and international routes. It has four operating centres in Malaysia, as well as a unit based in Thailand. As of the end of February, the company had a total of 74 aircraft - 58 Airbus 320 and 17 Boeing 737. The joint bookrunners on the AirAsia deal were CIMB and Credit Suisse.
p/s photos: Aum Patcharapa Chaichua