By Chan Quan Min
Opportunity knocks when a stock falls to an all-time low. Long-haul budget carrier AirAsia X is one such stock that saw panic selling after posting its fourth consecutive loss-making quarter this week.
Business model: AirAsia X is a long-haul budget carrier and one of the first of its kind when it took to the skies in 2007 plying routes too long for AirAsia’s narrowbody aircraft to fly economically.
The airline focuses on flights of more than four hours between its Kuala Lumpur hub and major cities in Australia and North Asia. It plans to expand flights from new hubs in Bangkok and Bali, both of which began operations this year.
Aggressive expansion has grown its fleet of widebody aircraft to 25 strong in a span of just seven years, almost all of them Airbus A330-300s.
Since late 2013, overcapacity and cutthroat competition in the industry has made it difficult for AirAsia X to shake off losses. The airline posted its fourth consecutive quarter of losses this week.
However, recent improvements in pricing power and much lower jet fuel prices are expected to contribute to a turnaround in the last quarter of this year, the airline’s management said.
AirAsia X shares are listed separately from parent AirAsia on Bursa Malaysia following its July 2013 initial public offering.
Shareholders and management assessment: AirAsia X has three main shareholders. The largest is Tune Group Sdn Bhd with an 18% equity stake followed by AirAsia Bhd with 14% and Kamarudin Meranun, a close business partner of Tony Fernandes, with 7%.
Tune Group is the holding company for Fernandes and Kamarudin’s investments in airlines, hotels, and telecommunications.
AirAsia X CEO Azran Osman-Rani was handpicked by Fernandes to run AirAsia X. Azran was hired from satellite television provider Astro where he was senior director of business development. Before Astro he held positions at management consultancies McKinsey & Company and Booz Allen Hamilton.
Fernandes and Kamarudin sit on the board as non-executive directors while former minister Rafidah Aziz is the chairperson.
Share performance: AirAsia X offered its shares at RM1.25 during its stock market floatation in July last year. Since then, the share price has not once risen above the initial offer price, disappointing early investors.
The stock closed on Thursday at 61.5 sen per share, just half of what the same share sold for 17 months ago during and immediately after the stock market floatation.
What analysts think: Analysts were not impressed with the latest set of third quarter results AirAsia X reported this week that revealed deepening losses.
Mohshin Aziz of Maybank IB Research said the financial loss was “larger than expected at 143% of house and 224% street full-year forecasts”.
AirAsia X reported a third quarter operating loss of RM140 million and an even larger net loss of RM211 million after accounting for finance costs and foreign exchange losses.
This is the fourth consecutive loss-making quarter for the airline. Even more worrying is that the unencumbered cash balance is at an “all-time low” with gearing at 2.1 times as of end-September, according to Mohshin.
“There is some respite from the management’s plans to recapitalise and the start of a wet-leasing business,” he said. “Equity issuance is still a necessity, in our view.”
AirAsia X announced a fresh business plan to halt growth at its Kuala Lumpur hub with planes due for delivery either deferred to after 2017 or redeployed to its new hubs in Bangkok and Bali.
It is replenishing its cash balance through the sale-and-leaseback of at least six aircraft.
During the lean season from April to September next year, the airline plans to lease out its planes complete with crew (wet-lease) to ply European summer travel routes or take pilgrims for Umrah.
Analysts said the root of the airline’s financial troubles is a combination of poor yields from overcapacity in the market and a dip in demand following the twin Malaysia Airlines tragedies involving flights MH370 and MH17 earlier this year.
A recovery could be possible if the new business plan can be executed as planned. AirAsia X also stands to benefit if crude oil prices, which have fallen by 25% over the past few months, continue to stay low.
“We acknowledge that the revised business revival plan is better than the one it replaces,” Maybank’s Mohshin said.
“The stretched gearing makes us extremely uncomfortable as AirAsia X depends on its forward sales and we forecast that it would have a capital deficit of RM150 million to RM170 million in 2015. The probability of an equity raising is almost certain in our view.”
StockStalk: AirAsia X shares are available for a bargain. But investors who buy in now will be getting a battered company where future performance is uncertain.
Pricing the bottom is next to impossible but given the circumstances, it is quite safe to say this Bursa Malaysia counter is quite close to it. There is of course a chance that the share price could fall further.
Investors that choose to buy AirAsia X shares now will do so on the strength of the management and their business plan. Indications are the plan is sound but, as with any plan, comes with execution risk.
Investors that choose to buy AirAsia X shares now must also be prepared to cough up more money if the airline decides to take the equity raising route, which, according to one analyst, it is almost certain to do.
Fuel prices are another thing to consider given recent changes in the price of crude oil in international markets. Brent crude, used as a benchmark, is trading at under US$80 a barrel, down from US$110 a barrel in June.
Fuel costs are the single largest component of operating expenses for AirAsia X with a 40% share. The airline claims that a US$10 drop per barrel in jet fuel price will result in savings of RM120 million per annum.
Entering AirAsia X at this tumultuous time is not for the cautious investor but for the investor who wants to take a bet on the ability of the management team.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KiniBiz makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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