On Oct 18th I made the following blog posting: Air Asia Now Remains TIGHT-LIPPED On It's Privatisation Plan Details, a posting which was follow-up posting to Did Tune Air Said It Was Thinking Of Making a GO for Air Asia?
On Monday it made the following announcement: AIRASIA BERHAD (“AIRASIA” OR “COMPANY”) POTENTIAL PRIVATISATION EXERCISE OF AIRASIA
- We refer to the announcement made on 7 October 2008.
Tune Air Sdn Bhd (“Tune Air”), our major shareholder, had informed us that it is still in the midst of negotiating the terms and conditions with financial institutions and other potential investors to fund the potential privatisation exercise of AirAsia. An appropriate announcement will be made when Tune Air has formed a firm intention to proceed or not.
I had a chuckle! Still in the midst of negotiating?
I had even more chuckle when I read RHB Research notes of what they think of Tune Air announcement.
So RHB reckons that AirAsia is an under performer and values it at around 0.86 (me thinks this is rather generous valuation!) but what RHB wrote its most amusing.
- Market doesn’t buy it, apparently. Since the announcement was first made, the discount of AirAsia’s market share price to the “indicative privatisation price” has almost tripled from 6% (RM1.27 vs RM1.35) to 16% (RM1.13 vs RM1.35), indicating the growing market scepticism that Tune Air can pull off the deal against a backdrop of a global credit crunch. We remain big skeptics of this deal and strongly encourage minority shareholders to disregard it and move on with lives.
LOL! Encourage minority shareholders to disregard it and move on with lives! LOL!
Yes, the global credit crunch will obviously be a major stumbling block to this deal. AirAsia is at 1.15 now and this would equate to a market cap of around 2.73 billion. Let's assume that the global credit crunch is a non-issue.
Let's look at AirAsia last reported earnings again. Quarterly rpt on consolidated results for the financial period ended 30/6/2008
The balance sheet as it was.
Cash is nice, AirAsia had some 1.084 billion in its piggy bank.
However... here comes the horror part!
AirAsia total debts is a whopping 5.397 billion.
Which means AirAsia is in a massive net debt of 5.397-1.084 = 4.313 billion.
Remember at 1.15, AirAsia is currently valued at some 2.73 billion.
Simple question now, how much would anyone wants to pay just to own this company that is in a net debt position of 4.313 billion and has a debt obligation of 5.397 billion?
(ps. this figure should be more since AirAsia debts are mainly US denominated and with the ringgit trading lower against the USD, AirAsia debts should be much more!)
And what kind of returns are you getting?
Well, for the last reported earnings, AirAsia made a net profit of 9.4 million! Yes 9.4 million only.
And the current market valuation of the stock is some 2.73 billion!
Do I see some disconnect here?
And what did Tune Air said it wanted to do? Privatise AirAsia? LOL!
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2 comments:
Hi Moola,
Thanks for your insight and wonderful analysis. I always follow your blog and indeed i feel that it is far more better than the most so-called experts.
Anyway, i would like to know your reasoning for using this equation:
Cash - Total borrowings = Net cash / (Net debts)
In Air Asia (AA) case, for example, in its 30th June report, it has a massive net debts. Yet, is it a danger sign? I don't know. For me, since AA is in capital intensive industry, i think it may be a norm to have net debts? Put it this way: when i buy a house with price tag of $ 10, i pay with cash $1 and borrow $9 from bank. At a point of time, ie: 30th June, my balance sheet will show that i have $9 net debt ($1-$10=-$9). Is it a concern? As long as i have a positive cashflow all the times to serve my installments, it shouldn't be a issue, right? So, please tell us your reasoning for using the equation above.
BTW, i am not so fancy about AA as an investment choice and i do not have any interest, directly or indirectly from AA, ie: i do not own single shares of AA or employed by them.
Lastly, i do hope that this serves as a ground for our discussion. Thanks for your time.
Dear My Fortune One,
Not all debts are bad.
However, the biggest problem always is too much debts.
Always is.
And this will never change.
Regarding your example and based on your example alone, obviously in our daily life, what matters to the bank is the ability to service the debts and as long you you can pay the installment payments due, the banker would not evaluate the health of your personal finances.
However, from a long term business perspective, this is different.
Think of this as real life business proposition.
Think about it.
Would you want to go into a business relationship with a company that is buried so deep in debts?
Is AirAsia way over leveraged? My opinion is yes. And in my flawed opinion I do think that it's simply suicidal!
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