TIGERTALK All things considered, the ongoing AirAsia X initial public offering (IPO) represents an expensive bet on a turbulent Asia-Pacific aviation market.
There certainly is good reason to invest; the airline is operating with the lowest unit costs in the region and has the aircraft orders to meet growth, alongside the booming demand for air travel.
However, investors intending to buy into the IPO should proceed with caution. Analysts warn that the retail price being offered is expensive.
Analysts at Hong Leong Investment Bank and TA Securities have said the IPO is overpriced. The IPO price of RM1.45, according to analysts’ calculations could be marked up by 5 sen to as much as 20 sen from its fair value.
More importantly, because too many variables must be considered to forecast future performance, investors should recognise that the outlook ahead is unpredictable, said an analyst from Hong Leong Investment Bank.
Airline stocks are highly cyclical and there’s loads of competition out there - it does not need Tiger to say it’s a jungle out there. Share price movements can be influenced by air passenger demand patterns and macroeconomic factors, said the analyst, who specialises in aviation equities.
Although demand within the Asia-Pacific aviation market is growing, there is also a sizeable amount of new capacity coming onstream from other airlines in the region. If excess capacity is not taken up, competition between the airlines could be severe, he added.
AirAsia X, a long-haul budget airline and sister company to high-flier, AirAsia, has plenty of new seats to fill in the coming years. The airline’s expansion plans will see the carrier take delivery of 22 Airbus A330-300 during the next four years up to 2017, tripling its fleet of aircraft from 11 currently.
“Should AirAsia X have to discount heavily to fill its planes, then yields may suffer, leading to lower profitability,” said the Hong Leong analyst.
He reckons the fair value for the IPO price is closer to RM1.20 than the RM1.45 now being offered to retail investors.
Meanwhile, analysts at TA Securities pegged their fair value for the IPO price slightly higher, at RM1.40, 5 sen below the IPO retail price now being offered.
TA Securities based their calculations on forward estimates, which are in turn dependent on several assumptions: capacity growth of between 24%-53%, average fare declining between 1%-6%, load factor stabilising at or just above 81% and jet fuel prices trading at US$130 a barrel.
Reluctant to reveal numbers
When contacted by KiniBiz to provide technical information on the computation of the IPO valuation, AirAsia X’s senior management were reluctant to reveal their numbers.
The basis of calculation of the IPO price set out in the prospectus only listed several influencing factors.
There was no earnings projection data in the prospectus, unlike the 2004 AirAsia IPO prospectus. However, this is understandable, as, in the time since, the Securities Commission eliminated the requirement to provide profit forecasts.
Tiger says that’s a step back and makes it even more difficult for retail investors, who have no benefit of guided earnings figures as do institutional investors, to navigate around the perilous hazards that abound in the Malaysian corporate jungle. Even the jungle needs some rules.
Meanwhile, the AirAsia Group marketing machine is in full swing, with the AirAsia X senior management team led by Tony Fernandes running an international roadshow to promote the IPO in international markets.
It might be too early to gauge investor interest, but the IPO has definitely caught the interest of the international media.
On the airline’s balance sheet, industry analysts at Hong Leong Investment Bank and TA Securities said that AirAsia X’s high gearing ratio of 2.4 and weak cash position was typical of airline equities, even more so, an airline in a growth phase, as is AirAsia X.
AirAsia X’s prospectus states a pro forma gearing ratio of 0.8 upon listing, as the company plans to use some of the IPO proceeds to repay borrowings.
This IPO will be one to watch, and will test the resilience of AirAsia X, which has been operating for close to six years.
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