By Stephanie Jacob
2014 was a tough year for the aviation industry in Malaysia and AirAsia Bhd was not spared, with headwinds following it into 2015. However, with low fuel prices and potentially less competition from MAS, the low-cost carrier might be heading for clearer skies.
Business Model: Malaysians are well versed with the AirAsia Bhd success story and its founders Tony Fernandes and Kamarudin Meranun. When the duo took the airline over for a token RM1, it was a tiny operation and heavily indebted to the tune of US$11 million.
Today the airline is Asia’s largest low-cost carrier and services an extensive network with over 90 destinations. From starting with just two aircraft, it today has a fleet of 80 planes. It has been named the world’s best low-cost carrier airline in the World Airline Survey by Skytrax for the past six years in a row.
Last year was challenging for both AirAsia and Malaysian aviation in general. The two Malaysia Airlines (MAS) tragedies and the AirAsia Indonesia crash affected tourist sentiment and consequently load factors. Furthermore, the price war between AirAsia and MAS also had a significant negative impact on the low-cost carrier load factor.
While revenue for the year rose, net operating profit for the financial year 2014 (FY14) contracted by 40.3% year-on-year (y-o-y) to RM436.9 million as a result of higher operational and finance costs which increased 23.8% y-o-y.
Shareholders and management assessment: Two-thirds of AirAsia Bhd shares are on free float with a wide shareholding spread. Of the remaining one-third not actively traded on Bursa Malaysia, only three shareholders have an equity stake higher than 5%.
Tune Air Sdn Bhd, the private investment vehicle of Fernandes and Kamarudin, holds the largest single chunk of shares with a 19.1%% shareholding. The other two major shareholders are the US-based Wellington Management Company with a 13.5% equity stake and the Employees Provident Fund (EPF) with a 8.7% equity stake.
Aireen Omar is chief executive officer of AirAsia’s Malaysian operations, reporting directly to group CEO Tony Fernandes who is the leading force of the group. Chairman Kamarudin Meranun is also an active member of the AirAsia Bhd team and often is in charge of negotiations with stakeholders.
Share performance: According to Bloomberg, AirAsia Bhd has been trading in a 52-week range of RM2.18 to RM2.94. The group has a one year return rate of +0.75%, and therefore has underperformed the FBM KLCI which has a return rate of +3.07%.
According to Reuters, the group has a beta coefficient of 1.75, therefore trading above the overall market volatility. A value of 1.0 reflects the average volatility of the stock market.
With national carrier MAS having been delisted from Bursa Malaysia, AirAsia Bhd and its affiliate long-haul carrier AirAsia X are the only listed airline groups on the local bourse.
What analysts think: Reuters has compiled the calls of 24 analysts currently covering AirAsia Bhd, out of which the overall consensus is “buy” with 15 analysts taking this stance and four others have an “outperform” call. Four analysts have a “hold” call and one has a “sell” call on the airline.
Earnings forecast:
StockStalk: 2014 was a tough year for AirAsia Bhd as it faced multiple challenges ranging from poor consumer sentiment as a result of multiple air tragedies to a price war between itself and full-service carrier MAS. While its revenue grew y-o-y, so did its total operating expenses and this led a drop in its operating income.
It was dealt a further blow at the very end of the year, when an aircraft operated by its affiliate AirAsia Indonesia crashed at sea – and this has had an impact on sentiment coming into the first quarter of 2015 (1Q15) as both operations in Malaysia and Indonesia scaled down marketing promotions as a mark of respect. As a result, analysts expect the airline’s first half of 2015 results to also disappoint.
The impact of these challenges has been reflected in its share price which has at times over the past few months seen sharp declines, in particular after AirAsia Bhd’s FY14 results were released at end-February.
But there are silver linings for AirAsia Bhd, none more so than the fall in crude oil prices. And analysts believe that should prices continue at to trade at this level it will help boost the carrier’s bottom line significantly.
According to TA Research, AirAsia Bhd’s management has only hedged 50% of its fuel needs at US$88 per barrel for 2015. Therefore even after taking into account hedging losses from that, the airline should still see net cost savings from the current low fuel prices.
The research house added that should oil and fuel prices fail to recover in 2H15 then a positive earnings surprise from AirAsia Bhd can be expected.
Affin Hwang said that since recent headwinds has given AirAsia Bhd’s share price a beating; it believed that most of the negative news have already been reflected. Currently, it is trading at an undemanding valuation below its three year historical average forward price-earnings ratio of 12 times, added the research house.
AirAsia Bhd is an option for the investor who can stomach the near-term headwinds and the likely to be disappointing 1H15 results. The group has a strong market leadership position which is unlikely to see a serious challenge anytime soon. It is also led by a strong and proven team which has successfully navigated the carrier out of challenging times before.
Investors should remember that airlines are particularly susceptible to international events and therefore carry an amount of added risk. Nonetheless, there are potentially some bright spots in the horizon for AirAsia Bhd.
Apart from savings from the low jet fuel prices, AirAsia is also boosting its ancillary services to expand revenue from this area. This includes the introduction of WiFi on all its planes by 2H15, with 20 planes already having the service as at end-2014.
Furthermore, with MAS likely to rationalise routes and capacity under its restructuring plans, AirAsia Bhd’s management believes it will see a normalisation of its fares which should also help its top line.
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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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