On the Edge last night:
- BA Merrill Lynch pegs AirAsia low at RM1.85 Business & Markets 2013
Written by Ho Wah Foon of theedgemalaysia.com
Wednesday, 06 March 2013 17:30
KUALA LUMPUR (Mar 6): Bank of America Merrill Lynch (BAML), saying it is keeping its “negative” stance on AIRASIA BHD  ahead of the general elections, has given a price objective of RM1.85 to the airline -- a 37.5% discount to its last traded price of RM2.96.
The research house said: “We believe increased news flow over Malindo’s launch in the coming weeks and fears of how severe the resulting price erosion will be, as well as uncertainty over the upcoming Malaysian elections, will keep the stock under pressure.”
BAML, which released this analyst report after a meeting with AirAsia’s management at ASEAN Stars Conference 2013 in Singapore today, said:
“Malindo entry is a key concern....Given the imminent start of new rival Malindo in its home market in Malaysia, AirAsia’s stock price could face an intensification of headwinds in the coming weeks.”
It noted Malindo has received its Air Operators Certificate last week and is on-track to launch its operation within the next two months.
It added that although AirAsia is ramping up its capacity aggressively, it is “doubtful” that these additional seats can be filled at the same unit revenues.
Noting that Malindo Air launch means even more capacity added, the US research house said: “In addition to AirAsia's growth plans, we expect the pricing environment to see added downward pressure with the Malaysian-based LCC fleet swelling by 30% in 2013.”
The research house also commented that AirAsia’s management “looks increasingly thinly spread”.
It noted that Japan and the Philippines are still loss-making and its proposed venture in India is likely to consume significant time.
“While Indonesia had a good 4Q results aided by seasonality, Thai AirAsia remains the star performer among associates due to a lack of domestic competition, with its holding company Asia Aviation our preferred LCC play in the region.”
BAML said its PO of RM1.85 is based on 6x recurring PE for 2013E, inclusive of recognised and unrecognised associate profits and losses.
“This is a trough valuation multiple reflecting our expectation of a sharp decline in earnings through 2014 as main rival Lion Air aggressively expands in Malaysia,” it said.
As mentioned several times, I had noted the improvement in AirAsia balance sheet back in 2010. ( You can refer this posting And what about AirAsia's earnings? ) But all this 'good work' is undone when it announced back in 2011 it's new air craft purchases. ( Refer: How Is AirAsia Going To Finance This New Airbus Order? )
It made no sense at all.
AirAsia was already struggling in 2010 to accept new delivery of air crafts.
Back in 2007, AirAsia placed an order of 175 new air crafts. I had felt that order was way too huge. By Aug 2010, I was proven correct.
AirtAsia had to defer acceptance of new air crafts. The new air crafts deliveries was choking its cash flow and balance sheet.. Debts had been increasing astronomically to finance the deliverance of the new air crafts.
So in 2010, after the deferments, things improved.
AirAsia balance sheet started to improve.
All this changed for the worse again come Jun 2011.
With 90 new crafts YET to be delivered from the 2007 order of 175 new air crafts, AirAsia stunned everyone by placing a new 200 air crafts!
It blew my mind away.
Why the need to rush to place a new order?
They were already struggling with their old and yet they are placing such a new, bigger order.
The amount of capital commitment from this new order is absolutely insane in my opinion.
Capital commitment contracted for now stands at 64 Billion ringgit and I would expect it to increase to some 74 billion or so.
This amount is simply staggering.
And now comes Malindo.
New airline means more compeition.
Can AirAsia manage a new compeitor right now when it is heavily committed to new air crafts?
And mind you, AirAsia total debts currently stands at 8.4 Billion. Debts is now increasing again and it will increase rapidly again with AirAsia committed to all these new air crafts.