AirAsia: Lunatics And Cheap Talks?

Is the demand for cheap talk really so great? It really makes me wonder.

Let me show you an example again today.

Published on Associated Press Malaysia: Budget Airline AirAsia Can Stay Profitable Even If Oil Hits $200 A Barrel, CEO Says

For some the headline is already plain cheap talk!

You see, as stated in the article itself..

• Airlines have been struggling to contain costs this year as oil prices stay above US$130 a barrel. Scores of startup carriers have gone out of business and several major carriers have raised fuel surcharges, cut capacity and deferred plane orders or shed jobs.

Other airlines are struggling big time with oil prices staying above US130 per barrel. And here, our local CEO, decides to boldly announce that his airlines can stay profitable even if oil hits US$200 per barrel.

I wonder if the word humble ever exist?

Here are some of my issues.

• AirAsia reported an 86 percent jump in its January-March net profit from a year ago to 162 million ringgit (US$50 million), buoyed by higher passenger demand and large foreign exchange gains.

Blogger Seng had mentioned this issue before. The Edge on AIRASIA

If one reads that said quarterly earnings report here, AirAsia_Bursa Announcement_1Q2008_Final.pdf, one would realise that the 162 million ringgit was boosted by a 51.4 million in deferred tax allowance (you can read more about it here: AirAsia's deferred taxes issue. and More on AirAsia's Deferred Tax Issue ) and a forex gain of 86 million. This gives a whole new meaning to that net profit 162 million ringgit, since the earnings was boosted by extra-ordinary items.

And the biggest issue for me was the very last sentence.

• "Only a lunatic will hedge fuel _ it's too volatile. We will just have to ride it until there is some stability," he said. "You have to build a business that is sustainable at whatever price and the only way... is to have topline growth and good growth.

Only a lunatic will hedge oil???????????

Perhaps this article on 11th January 2008 will refresh memory.

• AirAsia: No more bets on oil price
  
  There has been significant selling from AirAsia's foreign shareholders and this is 'related to AirAsia's fuel-hedging policy', says an analyst
  
  Published: 2008/01/11
  
  AIRASIA Bhd, Asia's biggest discount carrier by fleet size, will stop making bets on the price of oil, after incorrect forecasts contributed to a 16 per cent slide in shares over the last month.
  
  "It's a nightmare because the volatility is crazy," chief executive officer Datuk Tony Fernandes said in a Bloomberg Television interview on Thursday. "We took a bet that oil won't go above US$90 a barrel and it has and it's staying there."
  
  Crude oil rose to a record US$100 a barrel earlier this month instead of falling as AirAsia had predicted. If the price of oil remains at that level, earnings could fall by RM8.45 million a month because of speculative hedging, according to Christopher Eng, an analyst at OSK Research Sdn. in Kuala Lumpur.
  
  There has been significant selling from AirAsia's foreign shareholders," Eng wrote in a January 9 report. The drop is "related to AirAsia's fuel-hedging policy, which some parties considered excessively speculative."
  
  Fidelity International cut its stake by 9.8 million shares as of December 24, according to Bloomberg data.
  
  The Sepang, Malaysia-based carrier also said it will keep ticket prices unchanged even as the cost of fuel rises.
  
  "The danger for low-cost carriers is that it will impact demand," Fernandes said in Singapore. "You can't keep raising prices all the time. Oil inflation doesn't move in line with salary inflation."
  
  Fernandes is counting on higher ticket sales and revenue from selling food, drinks and other services to offset higher expenses.
  
  The price of jet fuel, the biggest expense at most Asian airlines, fell one per cent to US$108.50 a barrel in Singapore yesterday, according to data compiled by Bloomberg.
  
  That is 53 per cent higher than a year earlier. Crude oil futures reached a record US$100.09 a barrel on January 3.
  
  AirAsia fell one sen, or 0.6 per cent, to RM1.58 at the 5pm close of trading in Kuala Lumpur yesterday.
  
  AirAsia has ordered 175 single-aisle A320s from Airbus SAS, worth at least RM39.33 billion at list prices, as it wins permission to start new routes, including flights between Kuala Lumpur and neighbouring Singapore.
  
  For now, it has enough aircraft to expand operations and will not need to exercise options to purchase another 50 planes of the same model "for the next few years," Fernandes said.
  The carrier, which will begin services between Singapore and Kuala Lumpur on February 1, plans to operate as many as 20 daily return flights between the two capitals by 2013, carrying as many as seven million passengers, he said. - Bloomberg

Lunatic?

Hmmm.... this really reminds me of the issue of AirAsia promised earnings during its IPO. (see http://everything27.blogspot.com/2005/11/airasia.html )

When AirAsia made its IPO last Oct 2004, there were indications that perhaps their IPO projection earnings was simply too optimistic.The following is a snippet from one our local newspaper business section.

• AirAsia expects profit to soar
  By ALICE CHIA
  
  BUDGET carrier AirAsia Bhd expects net profit for the financial year ending June 30 2005 to more than triple to RM159.9 million compared with RM49.1 million before. Revenue is also expected to jump 90.1 per cent to RM746.6 million from RM392.7 million, according to its prospectus.

Yup. AirAsia expects its net profit to triple the very year its stock will be listed!

Very rosy isn't it?

And needless to say a year later, on Aug 2005, AirAsia simply missed its overly optimistic earnings forecast.

Here's another business article snippet.

• Monday August 29, 4:09 PM
  Malaysia's Airasia Misses Yr Net Profit Forecast
  
  ]KUALA LUMPUR, Aug 29 Asia Pulse - AirAsia Berhad (KLSE:5099) has reported group profit after tax and minority interest of RM111.635 million (US$29.6 million) for its financial year ended 30 June 2005, up 127.5 per cent year-on-year.
  
  However, the net profit was 30.2 per cent below the RM159.9 million forecast for the year in the prospectus issued in relation to its initial public offering [IPO] last year, the budget airline said in a filing to Bursa Malaysia on Friday.

Let me work out what it means.

When it AirAsia made its IPO prospectus, the total number of shares for AirAsia was 2,335 million shares.

Now based on AirAsia meeting its rosy IPO earnings projection of 160 million, an IPO investor investing in AirAsia was investing in a stock which promised to earn around 6.9 sen earnings per share.

The IPO price was priced at 1.40, which meant that the IPO investors assumed that they were investing in AirAsia at an earnings multiple of 21 times fy 2005 earnings.

Which is probably ain't too shabby if and if AirAsia delivers what its IPO earning promises.

However... AirAsia failed.

When AirAsia only managed a distance earnings of only 111 million for fy 2005, this totally changed the whole picture.

This meant that AirAsia only made an earnings per share of only 4.8 sen.

Instead of 6.9 sen.

Which ultimately meant that based at a price of 1.40, these IPO investors invested in a stock trading at an earnings multiple of 29x.

In investing, whether if one is investing in a stock or a property, one's investment goal is to get our investment purchase right.

When we buy right, the chances of us achieving success in our investment simply increases mah.

Tiok boh?

In simple, whenever we pay less, we should be getting more.

So at 29x earnings multiple... do you think the IPO investor had gotten a fair deal?

Yeah, yeah, yeah... them smartie alecs would be saying no one forced us to invest in this stock mah.

True. So very true.

However, here's another food for thought.This AirAsia IPO was to raised a whopping RM1.04 billion.

• If the retail shares are priced at the maximum MYR1.40 each and institutional shares at MYR1.51, as AirAsia assumes in its prospectus, the IPO will raise about MYR1.04 billion, surpassing KLCC Property oldings Bhd.'s (5089.KU) MYR766 million offering in August.

Now for me, would it be wrong to say that this is a whopping lot of moolah to be parked at a stock at a high earnings multiple? A huge drain of market capital? Am i wrong to put it that way?

Now here's another food for thought. After missing its earnings forecast, there were brokerage houses still expecting rosy earnings numbers from AirAsia. One broker had their earnings estimate set at around 170 million for its fiscal year 2006. Some even had it around 180 million.

All expecting and assuming that AirAsia will deliver such rosy earnings.

Well, well, well.. AirAsia announced its first quarterly earnings for its fiscal 2006 yesterday.

AirAsia only made a net profit of 11 .67 million.

So when the business article today posted that more passengers lifted AirAsia earnings, it just simply amuses me.

Put it this way.... 11.67 million ar? At an annualised basis (err assuming that AirAsia will make lebih kurang the same amount of net profit per quarter for the remaining of its fy 2006) AirAsia will make around 46 million.

Ahem.. that's an eps of only 2 sen lor.

Also... at this rate of earnings... do you think AirAsia can make more moolah this fiscal year compared to last year total of 111 million?


Soooooo based at current price of 1.61, AirAsia is trading at a whopping earnings multiple of 80.5x its annualised 2006.

How?

Sibeh geng leh?

So u want to buy this discounted budget Airline stock onot?

Oh, another food for thought..

We have seen two of our recent biggest IPO, Titan and AirAsia, making overly optmistic earnings projection in their IPO prospectus.

Yes, earnings projections is never easy. It is very understandable that companies will miss their projections but when their earnings projections misses by miles, it really makes me wonder the quality of our Malaysian Talk.

Is all our corporate talk so cheap?

I really wonder.

And guess what? AirAsia closed yesterday trading at 0.875!!!!!!!!!!!

The following chart was posted on June 1st to highlight AirAsia performance since its listing.

Yup, the plane is plunging!

Blogger Seng too had made comments on this article, AirAsia still profitable on US$200 a barrel oil?