Friday, July 12, 2013

AirAsia X Listing / The Tony Fernandes Effect

In light of the listing of Air Asia X, I think its worthwhile to repost this which I wrote last month. When Tune Insurance came out, I think I was the only sucker touting it as a good thing. It opened weak and stayed that way for a few weeks and then surged past my fair value.

So how about AirAsiaX? It will go round the same route as Tune Insurance, i.e. open weak around RM1.35-1.40 (this was my original estimate when the touted IPO was around RM1.35, that range would be moved lower 8-10 sen based on the final IPO price) and stay around IPO price for a few weeks and then move to my year end fair value of RM1.70-1.80.

I call it the Tony Fernandes effect. While most people may not like his personality ... calling him brash, entitled, too in your face ... most will still acknowledge that he is a very good entrepreneur and business person. That also sums up my personal view of Tony.

The TF effect also has it that many critics (analysts and reporters) like to cut him down to size. Hence it is very unlikely that TF will get favourable press. Of course many will say AirAsiaX is a tough business, its not budget airlines you know, its over crowded, its cyclical, blah blah ... For all... please refer back to what you said about Tune Insurance, then talk to me.

The TF effect also has the rest of the world always thinking TF and AirAsia are always dreaming up of new companies to list and churn and make money for themselves. While that has some truth in it, it is also fair to say that TF is making use of the capital markets wisely. Tap it to enrich stakeholders and using other people's money to grow the company. Nothing sinister in that.

Its very hard for TF to get respect. Some might even say there is racial undertones involved. Whatever it is, check your biases. To me, its already very very difficult to have the lowest cost per mile as a budget airline. I think its so much easier to replicate that for long haul. There is still too much fat in long haul airline industry. 

To me, Tune Insurance is more attractive than AirAsiaX, but even so, I think it will prove to be a good investment if you hold at least 6 months-1 year. Before your bitching even ends, get your socks ready for Tune Hotels, just to grate you guys even more. That I think will be the most attractive of all.

BIG loyalty cardholders who have travelled on AirAsia X Bhd (AAX) over the past two years can subscribe for the long-haul, low-cost carrier's initial public offering (IPO) shares using the blue form. There are over 18,000 BIG members, of which 1,800 are Malaysians. However, those without the card but have travelled on AAX over the past two years and before June 10 are also eligble to use the blue form, as long as they get a BIG card before 5pm tomorrow, when subscription for the retail shares closes. This segment will pay the same price of RM1.45 a share as other investors and are also eligible for the free tickets that are being offered as part of the IPO offering. By using the blue form, they would not have to compete for the allocation of shares under the white form category, a source said.
Both the blue and white forms were for retail investors, who, incidentally, had oversubscribed for the shares by one time thus far. A total 50 million shares are being offered to retail investors under the blue form category, and 160 million shares by way of white forms.
To lure retail investors to subscribe to the IPO, AAX is dangling a zero-fare return air ticket to any destination flown by the airline to investors who buy 10,000 IPO shares, and three tickets for those who buy 100,000 IPO shares as part of its shareholder benefit programme. However, they will have to hold the shares for a minimum one year to be eligible for the free ticket, with a maximum period of three years. Of the 592.59 million new shares, the institutional offering is for 538.01 million shares and the retail offering, 252.11 million shares.
AAX intends to use the proceeds to help fund new aircraft acquisitions, as its expansion goes into overdrive over the next four years by adding 22 Airbus A330-300s to its fleet. It also has a firm order for ten A350-900s beyond that.


Mat keluang said...

Air different from other long haul airline.

Their destination are below 6 hour flight time.

They have proven record for the last three year,they make money.
They choose to fly on route that they can make money.
Smart move.

Mohammed said...

Why did Richard Branson bail out of Air Asia X before the IPO instead of waiting to make a killing?

Value Investor said...
This comment has been removed by the author.
Value Investor said...

Fuel expenses amounted to between 45-52% of AAX's total operating cost for the last 3 fin. years. An increase of USD1.00 in fuel price will result in a RM7.1 Million reduction in its operating profits. (Source: AAX IPO Prospectus - pg 269)

Based on its annualised FYE 31/12/13 PAT of RM200.8 Million (Q1 31/3/13 PAT = RM50.19 Million), a USD1.00 increase in fuel prices will have a 3.5% impact on its profits.

Unlike AirAsia, AAX is a long haul budget carrier and it burns more fuel per aircraft compared to its sister carrier. As such, it makes sense for AAX investors to monitor the jet fuel prices regularly to avoid any negative surprises on its results should jet fuel prices spike up.

bruno said...

It has always been my belief that some smart Umnoputra/putras with some very smart brains was behind Tony from the very start.They had everything cut and figured out for him.And it still is my personal opinion.Even smart Oxen boy Khairy cannot buy an airline for a ringgit,walk into a bank and not get chased out by the janitor,least to say get a loan of hundreds of millions.

bruno said...

The markets just would not stop going up.The Dow and the S&P made consecutive highs after another.The markets still have lots of room to go higher,so let the bulls have their fun first.

As usual the fun and excitement was in the fx markets.Bulls and bears are getting torn apart either ways up or down.It was a traders market,depending on which side one is on.Our long Aussie was limit at .9295.After that we were short and long umpteen times.

When Big Ben spoke after markets closed,the fx markets went on a roller coaster ride.Will little liquidity,as Asian traders were still fast asleep the greenback fell out of bed and ended up with a bruised red,purple and red butt,only to recover by week's end.

The Aussie was the worst performer.From morning 92 to 91 after fed minutes.Six hours after Big Ben spoke the Aussie was at 93,only to hit 3 yrs low under 90 this morning and ended the week at .9050.Give me this type of whipsawwing markets any day over a sleepy man on a tongkat one.

bruno said...

A badly bruised,beaten up Aussie enroute to 85 cts is major gurus concensus target.This target will be achievable,but not before a major correction of fib 36-50 % from 1.05.So do expect a correction to at least 95-97.5 cts.

Whether it gaps up or down early trading,before Asian markets open Monday,I will be a buyer.Longer term,I still mantain my view of 60 cts or below.But right now,lets enjoy the spoils of an overcrowded market.A short squeeze will soon be in the works(technically wise,the daily RSI has been flashing bullish divergence for the last couple of weeks).Friday's three years lows could be a washout of Aussie longs.

The stock markets,lets let the brave bulls do the hard work of pulling an over crowded trainload uphill.We will take over when they get exhausted and fall flat on their faces.Have a nice weekend,folks.

ck said...

As an entrepreneur, Tony has done exceptionally well. Especially in an industry where competition are keen and there are many variables to take care of beside operation efficiency. The outlook of airline is unpredictable and operation margin are thin.
Tony is embarking on another risky venture, to be a successful global multi-hub low-cost carrier network. It is true that Asia-Pacific Aviation market is growing, there are also sizeable new capacity building up from other airlines serving in the same region. Competition could be severe and price cutting can affect yield factor and its profitability would suffer.
AirAsia X intends to take delivery of 22 Airbus A330-300 during the next four years up to 2017, tripling its fleet of aircraft from 11 currently.
This will translate into heavy borrowings, interest and forex risk, its foreign exchange gain or loss on borrowings from 2010 to 2012 can swing from positive RM 143 million to negative RM 25 million.
Another disturbing trend is its jet fuel prices have been moving up from USD 93 a barrel in 2010 to US$130 a barrel in 2012.
Its current ratio in 2011 and 2012 has dropped to 0.3 compared to 0.7 in 2010 due to a decreased in sales in advance and an increased in payables and borrowings. Its debt to equity ratio is 240% in 2012. If fares are booked in advance and with uncertain cost factors, yield may suffer further if costs escalate in future.
Working under such pressure cooking environment, no wonder Tony need to fire people for non-performance, he cannot afford costly mistake. Those who trust Tony and his team past reputation to deliver AirAsia X new vision can hold on to their shares for capital gain. Good luck!
Based on its Prospectus its NTA per share after IPO is 59.3 sen, its price to book value is 2.11 times. It does look quite pricy to me, definitely not a stock for retiree.

bruno said...

Just went flat on Aussie longs for plus 150 pics.Will re-enter at 30-50 pics below at .9190 and .9170.

bruno said...

Just missed the .9190 by a few pics.Aussie is now trading around .9230 level.Since have missed and cancelled the buy orders.Will play the correction on a sell in overbought territory instead,on 1 hr RSI 72%-75%.Just looking for 30-50 pics free kobi beef dinner.

bruno said...

Twelve hours later in early European trading,we had our 50 pics free kobi beef dinner.And took the rest of the week off.

On the sidelines and observing the action,Aussie is on a 100-150 pics sideways trading.We will buy Aussie again first thing,after 5 am Monday morning.Maybe this time the Aussie will shoot up and forget to stop.Have a nice weekend folks.