Friday, August 9, 2013

AirAsia X Berhad - Would it have run out of cash if it didn't list?

AirAsia X Berhad - Would it have run out of cash if it didn't list?

9/7/2013 – When AirAsia X Berhad lists on July 10 (tomorrow) it will be this year's biggest IPO, raising RM988 mln.

But it seems AirAsia X had little choice but to undertake an IPO.

With a debt-equity ratio of 2.4 times, it was already up to the gazoo in debt, but still has to pay for 22 Airbus A330-300s during the next four years.

It had to refund passengers who booked to fly on five cancelled routes, while paying those passengers to take other airlines.


All the while, its cash pile has been dwindling to the extent that it has blown through certain bank covenants.

The banks have given it until July 31 to get back into shape.

The IPO will come just in time.

In fact, it even tried to sell its shares to its passengers in the name of BIG loyalty programme.

But The Edge Malaysia reported that only 10% have been taken up out of the 50 mln shares allocated for this scheme.

Background

The long-haul sister to AirAsia Berhad was launched in late 2007 and flies to 14 destinations across Asia, Australia and the Middle East.

It carried 2.5 mln passengers in 2012 and aims to grow this to 7 mln by 2014.

Asia's air travel is expected to grow 6.7% annually in the next 20 years, not least because many parts of Asia are otherwise accessible only by boat.

High speed rail or highways are not an option.

AirAsia is extremely good at managing its costs – it has one of the lowest cost-per-unit ratios in the industry.

But with increasing competition, for example from Singapore Airlines' long-haul budget offshoot Scoot, investors will wonder whether it can continue to earn a decent margin.

It has priced its shares at RM1.25, 20 sen less than the indicative price of RM1.45.

The Star highlighted a comment from an aviation analyst, who said that the success of budget airlines has always hinged on flights not exceeding four hours.

Long-haul flights mean that margins will be thinner and efficiency is also compromised because it has to provide expensive services, such as inflight entertainment.

However, AirAsia has continuously amazed the market and the analyst wouldn't be surprised if AirAsia X succeeds.

HLIB Research has suggested not subscribing to the IPO for anything above RM1.20 as it is relatively expensive compared to other airlines and low cost carriers.

FINANCIALS

The company has disclosed these results for the financial year ending December 31, 2012:

Revenue: +5.6% to RM2 bln
Profit: RM33.9 mln vs (RM96.7 mln)
Cash flow from operations: (RM37.2 mln) vs (RM137.1 mln)

Question 1. What would have happened if it didn't list? Would it have run out of cash?

AirAsia X was unprofitable in FY11 as it suffered losses from its operations in India, New Zealand and Europe due to high fuel costs, lower load factors and the Christchurch earthquake.

It returned to profitability in FY12 because it cancelled those routes.

At the same time, losses increased as the North Asia segment was only launched a year ago and hence had lower load factors.

In addition, this segment was generating lower revenues as promotional fares were offered to stimulate demand.

AirAsia X has been able to grow in terms of revenue, but it burnt cash for both years to run its business.

It generated cash from operations of RM40.8 mln in Q1 FY13, but its cash balance has dropped from RM356.2 mln in FY10 to RM86.4 mln in Q1 FY13.

In addition, the group's net working capital for FY12 was a deficit of RM653.2 mln.

In Q1 FY13 that number had already blown out to 753.7 mln.

This was due to termination of advance ticket sales and passenger fare refunds in connection with the five routes it cancelled during the year, namely London, Paris, Mumbai, Delhi and Christchurch.

But the group believes IPO proceeds of RM859.3 mln and unutilised credit facilities of RM75.9 mln will be sufficient to meet its working capital needs for a while.

Question 2. How does it plan to cut down its debt from RM1.1 bln as at Q1 FY13?

It has an outstanding debt of RM1.4 bln but this will fall to RM1.1 bln post IPO.

And its gearing will drop from 2.4 times to 0.8 times, thereby providing more room to raise funds.

In fact, it withdrew RM38.6 mln on 21 May from its new debt facility of RM131 mln to partially finance payments of five A330-300s which are scheduled to be delivered between August 2014 and May 2016.

Separately, the group failed to meet its covenants for two of its debt facilities in FY12.

Its debt service coverage ratio of 1.01 times did not comply with the required debt service coverage ratio of 1.35 times under its RM48 mln time loan, of which RM32 mln is outstanding.

In addition, it also did not meet its current ratio requirement of 1.0 times under its RM100 mln revolving credit facility.

The current ratio measures assets against liabilities, and should ideally be in the range of 1.5 to 3 times.

But the current ratio of Air Asia X stood at just 0.7 times in FY10 and 0.3 times for both FY11 and FY12.

However, the lender has provided a waiver from complying with the ratios until 31 July 2013.

It will use IPO proceeds to repay all outstanding loan amounts under these facilities.

Question 3. Will its new loans be under more favourable terms?

In future, it expects to raise more funds to buy committed aircraft from Airbus and hence, capital expenditure will increase.

As a result, depreciation and other related cost will also increase.

HLIB Research expects the group to report a profit of RM139 mln in FY13, RM200 mln in FY14 and RM250 mln in FY15.

Question 4. When will it resume any of the routes - London, Paris, Mumbai, Delhi and Christchurch - it cancelled in the past?

Question 5. Will its yields trend down in future?

It is understood that regional airlines, especially full service carriers, continued to restructure their routes, and focus on Asia Pacific markets.

Even some other low cost carriers like Scoot, Cebu Pacific and Lion Air have set up divisions targeting the medium-long haul segment.

So, there is a sizeable amount of new capacity coming on-stream from these airlines in the region.

If excess capacity is not taken up, competition between the airlines could be severe.

This also leads to next question:

Question 6. Will it be able to fully utilise its new aircraft amid rising competition?

AirAsia X seeks to maximise yield and revenues by achieving a high daily aircraft utilisation rate.

The key drivers of aircraft utilisation rate are securing air traffic rights and landing and departure slots, maintaining an efficient aircraft turn-around time and ensuring high-quality and time-efficient aircraft maintenance programme.

The group estimates that its maximum aircraft utilisation rate is 17 hours per day.

Higher aircraft utilisation rates result in lower unit costs, given the higher number of passengers carried in relation to fixed operating costs.

Further details can be found on page 262 of the prospectus.

GROWTH DRIVERS

AirAsia X believes it has the lowest unit operating cost in the world.

According to a report prepared by Strategic Airport Planning and quoted in the prospectus says AirAsia X has the largest Low Cost Carrier (LCC) wide-body aircraft seat capacity in the Asia Pacific Region.

And it is expected to maintain this lead with the largest number of firm additional wide-body aircraft deliveries in the next five years.

Expand passenger base

It intends to stimulate demand and increase frequencies on existing twelve of its current fourteen routes.

It believes increases in flight frequency will improve customer convenience and stimulate more transfer connections, while enabling them to be a market leader on these core routes.

In addition to its current routes, it will expand into new routes within existing markets which will allow it to be more effective in marketing and efficient in operations.

It intends to look for new markets in South and Central Asia and North Africa and Eastern Europe that are within a commercially viable flying radius for A330-300 aircraft from its hub in Kuala Lumpur.

It also intends to establish new hubs in Indonesia, Thailand, Japan and the Philippines where it believes will provide additional feeder traffic.

In fact, it is already in process of setting its first new hub in Thailand.

Question 7. Who are the other investors in its Thai JV?

THAI AAX was incorporated in March 2013 with 33.3% held by the group for an initial investment of RM10 mln.

This will allow it to tap into the leisure market and to leverage on AirAsia's already established short-haul feeder network in Thailand.

Buy new fuel efficient aircraft

The group intends to increase its operating fleet size to 32 by 2016 by leasing and purchasing aircraft.

It currently operates a fleet of 10 A330-300s.

On 3 May 2013, it took delivery of an additional A330-300, which is scheduled to start flying this month.

It is also scheduled to take delivery of an additional 22 A330-300s up to 2017, and 10 A350-900s from 2018.

AirAsia X expects the greater fuel efficiency and longer range of the A350-900 to enable it to fly to destinations that would not be commercially feasible with its current fleet.

Question 8. Will it be able to maintain the lowest CASK after it starts deploying A350-900s after 2018?

It believes to have the lowest unit cost base of any airline in the world with a cost per available seat kilometer (CASK) of US$0.0374 or 3.74 US cents for FY12.

This implies a 67.3% lower CASK as compared to the average CASK of the 10 largest full-service carriers (FSCs) based in the Asia Pacific region.

And this has enabled the group to offer 30% to 50% lower fares than full service carriers (FSCs), thereby stimulating new market demand.

But it makes us wonder whether the group will be able to maintain its cost levels after it starts flying A350-900s in 2018.

Further details can be found on page 84 of the prospectus.

MANAGEMENT

Aero Ventures Sdn Bhd, AirAsia Berhad, Dato' Kamarudin Bin Meranun, Tan Sri Dr. Tony Fernandes, Dato' Seri Kalimullah Bin Masheerul Hassan and Lim Kian Onn are the promoters of the IPO.

Kamarudin and Tony Fernandes are the founders and non-independent non-executive directors with a direct interest of 3.7% and 2% respectively.

They both hold an indirect stake of 70.5% due to their shareholding in Aero Ventures Sdn Bhd and AirAsia Berhad.

Post IPO, their indirect stake will fall to 48.1% and direct interest will fall to 2.8% and 1.5% respectively.

Dato' Seri Kalimullah Bin Masheerul Hassan and Lim Kian Onn are also the non-independent non-executive directors among others.

Post IPO, their direct stake will fall from 0.9% to 0.7% each.

Apart from Aero Ventures Sdn holding 34.4% Bhd and AirAsia Berhad holding 13.7% after the IPO, Orix Corporation and Manara Malaysia's stake will be holding 6.4% each in the group.

Azran Bin Osman Rani is the chief executive officer and will hold 0.5% stake in the group.

According to MarketVisual.com, he was associated with Astro All Asia Networks plc and Bursa Malaysia Bhd in past.

Further details can be found on page 166 of the prospectus.

KEY RISKS

Like any other airline company AirAsia X is exposed to terrorist attacks, natural disasters, epidemics and social unrest.

But a few risks are related specifically to AirAsia X.

Highly competitive industry

AirAsia X's competes with Australia's Jetstar and Singapore's Scoot in the low-cost, long-haul segment.

In addition, the Philippines' Cebu Pacific is expected to launch a low-cost, long-haul operation in October 2013.

Given the competitive nature of the industry, its market share, traffic volume and revenue in the future may decline.

Question 9. How well is AirAsia X prepared to not lose its market share to Scoot and Cebu Pacific?

Ancillary revenues may not grow

Its business strategy includes expanding its portfolio of ancillary products and services.

However, it cannot provide assurance that passengers will purchase these additional ancillary products and services.

Question10. Can AirAsia X recoup the additional expenses it will incur on long-haul flights?

Increases in fuel prices or limitations on fuel supply

Fuel costs constitute 49% of total operating expenses for each of the years from 2010 to 2012 and 47.4% for Q1 FY13.

As such, its operating results are significantly affected by changes in the availability and the cost of jet fuel.

The group negotiates hedges together with the AirAsia group in order to increase the bargaining power arising from the larger quantities of fuel purchased.

It does not enter into any fuel hedging contracts directly, and any gain or loss arising from fuel hedging is recognised when risk is transferred by AirAsia to the group when it consumes the fuel.

It also passes a portion of fuel price increases to passengers in the form of fuel surcharges.

Any exorbitant increase in fuel price or a fuel shortage would have a material adverse effect on its financial results.

For example, the sharp increases in fuel prices from July 2010 to April 2011, after its commencement of flights to London in March 2009 and Paris in February 2011 significantly affected its ability to operate those routes economically.

Hence, it had to withdraw from both routes in March 2012.

Its London and Paris routes lost RM92.7 mln in FY11 and RM65.9 mln in FY12.

Question11. Is its hedging policy working?

Maintenance costs will increase as its fleet ages

As of March 2013, the average age of nine A330-300s, excluding the new A330-300 delivered in April 2013, was 4.9 years.

Its fleet will require more maintenance as it ages and the costs for this will increase.

Although the group predicts and expects fleet maintenance costs to increase in the future, it cannot predict the amounts of such increase.

Its maintenance and overhaul costs made up 6.8% for FY10, 5.8% for FY11 and 8.6% for FY12 of total operating expenses.

Increase in the cost of airport facilities and services

The group is highly dependent on its operations at the Low-Cost Carrier Terminal (LCCT) in Kuala Lumpur, where half of its daily flights originate.

A new low-cost terminal is being built in Kuala Lumpur, which, when completed, will allow the group to increase the number of routes its serves from its hub.

Question 12. Will it face an increase in airport fees when the new terminal is opened?

If construction of this new low-cost terminal is delayed, its expansion strategy may be impeded.

In addition, if fees and other costs related to operating out of the new terminal increase in relation to current fees and costs at the LCCT, its operations could be adversely affected.

Same for other airports.

For example, massive increases in airport taxes, fees and handling charges at Indian airports, contributed to its decision to withdraw from Delhi and Mumbai routes.

In May 2012, Delhi airport increased airport fees by 346%.

Together these routes lost RM36.5 mln in FY11, and RM4.4 mln in FY12.

Question 13. Is it already feeling the pain from the twice delayed opening of Kuala Lumpur International Airport 2?

According to media reports, the US$1.3 bln airport, designed as Malaysia's 'next generation airport hub' and built on 257,000 square meters was originally scheduled to be completed in April 2012.

The latest opening date has been given with June 28, 2013, but had to be revised again as Malaysia Airports Holdings Bhd said that contractors notified them recently that they could not meet this deadline.

They have asked to extend the KLIA2 opening date to 2 May 2014.

Ability to raise new equity and obtain financing for the expansion of aircraft fleet

In the past, AirAsia X borrowed money to acquire the aircraft and it will borrow more money to fund the acquisition of additional aircraft in future.

It is committed to buy aircraft from Airbus at a total price of US$6.9 bln or RM21.4 bln.

In addition, the future minimum lease payments for its aircraft under operating leases amounted to RM2.4 bln as at March 2013.

To meet these financial commitments, it may need to raise additional funds.

Question 14. How soon does it intend to raise money again?

Exposure to currency exchange rate movements

79% of total borrowings of RM1.4 bln were denominated in US Dollars.

Furthermore, due to the geographic diversity of its business, it receives revenue and incurs expenses in a variety of international currencies and therefore face currency exchange rate risks.

Appreciation or depreciation in the value of the US Dollar or other foreign currency relative to the Malaysian Ringgit may have a significant impact on our financial results as reported in Malaysian Ringgit.

For example, the recent volatility of the Iranian currency led to termination of its services to Tehran.

Question 15. Why doesn't AirAsia X hedge its US Dollar denominated borrowings?

As the US Dollar strengthened against the Malaysian Ringgit in Q1 FY13 it recognised unrealised foreign exchange losses on borrowings of RM 9.6 mln on its US Dollar denominated borrowings.

But it recognised a foreign exchange gains on borrowings of RM 35 mln in Q1 FY12.

However, the group did not have any form of currency hedging arrangements in place with respect to its US Dollar denominated borrowings.

Effective tax rate will increase after 2014

The Ministry of Finance of Malaysia granted AirAsia X an income tax exemption under Section 127 of the Income Tax Act, 1967 in the form of an investment allowance of 60% on qualifying expenditure incurred within five years until 31 August 2014, to be set off against 70% of the statutory income for each year of assessment.

For the past three years, this has added up to RM184.4 mln.

Any unutilised tax allowances may be carried forward after 2014 until fully utilised.

There is no assurance that we would be able to benefit from a similar tax exemption following the expiration thereof in 2014.

Accordingly, its effective tax rate may increase as a result of the termination of the existing tax exemption.

Question 16. What is the expected effective tax rate after 2014 if it doesn't succeed in extending the tax exemption benefit?

Further details can be found on page 51 of the prospectus.

ONGOING LITIGATION

AirAsia X is not involved in any litigation or arbitration.

But page 256 of the prospectus highlights a conflict of interest wherein the CIMB group, who is the principal advisor and joint book runner of the IPO, has granted a total of RM645.5 mln facilities to AirAsia X, of which the outstanding amount is RM310.1 mln.

It will channel part of the proceeds raised from the IPO to repay up to RM100 mln.

This is due to provisions set out in the facility agreements where in the event of a listing by the group on any stock exchanges, the proceeds raised shall be used to repay the facility.

Separately page 433 of prospectus highlights that the Malaysian Competition Commission (MyCC) had asked for information relating to collaboration agreement with Malaysia Airline System and AirAsia Berhad.

This is because it had received enquiries and complaints alleging that the collaboration among the parties infringes the provisions of the Competition Act 2010.

The collaboration agreement was about setting-up of a joint-venture company to provide aircraft component maintenance support and repair services.

It was also about establishing a special purpose vehicle by the airlines.

However, no collaboration or cooperation was effected nor were any of the proposals implemented by any of the parties.

The MyCC had further requested for information relating to AirAsia X's decision to cease services between Kuala Lumpur and London; Paris; Delhi; and Mumbai.

Not to forget, page 222 of prospectus highlights that it paid RM42.4 mln to accommodate and but seats for AirAsia X's passengers on MAS flights, following the termination of its service to these destinations.

However, the agreement with MAS expired in November 2012.

The MyCC wanted to examine concerns raised by consumers on the cessation of the services, in order to establish whether the collaboration between the airlines did not harm competition in the market.

It also requested additional information on meetings held between the parties to the collaboration agreement and copies of certain agreements.

The group did revert to the MyCC with the information requested.

Since then, the MyCC has not requested for any additional information or made further enquiries.

And the group has not been formally notified that it is under any investigation, nor has it been charged under or has infringed the Competition Act 2010.

Question 17. What could be the outcome if the Malaysian Competition Commission believes that AirAsia has infringed the provisions of the Competition Act 2010?

Further details can be found on page 431 & 443 of the prospectus.

DIVIDEND POLICY

AirAsia X does not have a dividend policy and is unlikely to pay any dividends in the immediate future due to its expansion plans.

Also, the payment of dividends will be limited by restrictive covenants contained in its current and future financing agreements.

Further details can be found on page 27 of the prospectus.

IPO PROCEEDS

RM 285.8 mln for repayment of bank borrowings
RM 280 mln for capital expenditure
RM 255.5 mln for general working capital
RM 38 mln for listing expenses

AirAsia X will use 33.3% of proceeds to repay those borrowings which carry higher interest rates.

So, it will save RM16.7 mln per annum interest payments.

But it is repaying only 20.4% of its total borrowing of RM1.4 bln.

Further details can be found on page 42 of the prospectus.

ISSUE DETAILS

Total Offer Size: 790.1 mln shares
Price per share: RM1.25/share
New shares: 592.6 mln shares
Vendor shares: 197.5 mln shares
Placement shares : 538 mln shares
Public shares: 252.1 mln shares

The selling shareholders - Aero Ventures, Orix Airline and Manara Malaysia – will receive RM246.9 mln in proceeds.

Hence, fresh capital from the IPO is RM740.7 mln.

The IPO raised a total of RM987.5 mln after pricing its shares at RM1.25 each for retail investors.

It marketed the IPO at between RM1.15 and RM1.45 a share to institutional investors, according to a term sheet.

KEY FINANCIALS AT LISTING
Key financials at listing

Market cap: RM 3 bln
Price/NTA: 2.1x
Price/Earnings: 125x

There are only four (4) reasons companies list:
1. Raise fresh capital for expansion. This is the most virtuous reason, because new shareholders can take part in the growth of the company.
2. Allow existing shareholders to (partially) exit. Frequently this means the best growth days of the company are behind it.
3. Change in laws and regulations. Such as when revised foreign ownership restrictions force existing shareholders to pare down their stakes, even though they might not want to do so. While this gives you the opportunity to buy into companies, you must ask yourself whether how the company is impacted by excessive regulation.
4. Raise the company's profile. New shareholders must ask themselves whether an ego-trip by existing shareholders is a good enough reason to buy into a stock.

"Sharing the growth" is frequently stated in the IPO's publicity material as the reason for listing, but that's just the marketing pitch.



Source/Extract/Excerpts/来源/转贴/摘录: InvestorCentral,
Publish date: 03/08/13

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Warren E. Buffett(沃伦•巴菲特)
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做自己熟悉的事,等到发现大好机会才投钱下去

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“犯错误并没有什么好羞耻的,只有知错不改才是耻辱。”

如果操作过量,即使对市场判断正确,仍会一败涂地。

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高估期间, 卖对, 不卖也对, 买是错的。
低估期间, 买对, 不买也是对, 卖是错的。

Tan Teng Boo


There’s no such thing as defensive stocks.Every stock can be defensive depending on what price you pay for it and what value you get,
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合股做生意,则公司股份的业绩高于一切,而股票的价值决定于盈利。
价值是本,价格是末,故公司比股市重要百倍。
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