Earnings worries dampen AirAsia stock

[Naim 6]

Wednesday May 28, 2008

The Star

 

Earnings worries dampen AirAsia stock

By LOONG TSE MIN

 

PETALING JAYA: AirAsia Bhd shares have been sliding in the past two trading weeks on concerns the budget carrier's first-quarter results, to be announced tomorrow, would not be as good as last year's.

 

The shares have fallen from RM1.23 on May 13 to an all-time low of RM1.01 yesterday.

 

According to analysts, the market's main concern was that AirAsia's first-quarter results would not be as good as the previous corresponding period's.

 

“Higher fuel prices and lower-than-expected load factors, especially on regional routes, contributed to the concerns,” a senior analyst at a local brokerage told StarBiz.

 

The sell-down in the counter was sparked by the disposal of 5.5 million shares on May 14 by substantial foreign shareholder T. Rowe Price Associates although this was not the main cause.

 

After the disposal, T. Rowe's stake was reduced to 7.06%.

 

With its recent route expansion, the load factor for AirAsia's regional routes is estimated by some analysts at 72.1% versus almost 80% for domestic routes.

 

Another analyst at local brokerage felt that the main reason for the sell-down was concerns over AirAsia's earnings.

 

On the stake sale by the foreign investor, he said: “We have been seeing a fair number of foreign parties reducing their stakes in Malaysia mainly for liquidity needs, maybe to meet cash calls in the US due to the subprime meltdown.”

 

The analyst added that this was likely in AirAsia's case as it was a stake reduction rather than an outright sell-out.

 

“Nonetheless, the reasons for the sale could be very different from that of domestic investors,” he said.

 

His concern is AirAsia's derivatives position of selling call options at US$82.6 per barrel, which became effective at US$90 per barrel.

 

Nymex crude oil crossed US$90 a barrel on Oct 25 last year.

 

The position would have cost AirAsia about US$50 a barrel and should have made its impact in the last quarter but did not, the analyst said.

 

As such, the market was expecting some impact in the first quarter ended March 31, he said, adding that the amount was “quite large'' but did not elaborate.

 

That said, AirAsia has taken opposite positions to offset the shorted calls at US$82.6 per barrel, so costs on fuel hedging would not be so high, but some net costs were still expected.

 

However, on the flipside, if crude oil prices were to fall below US$90 a barrel, AirAsia was expected to “gain doubly” from having lower direct fuel costs as well as gains from trading derivatives, the analyst said.

 

http://biz.thestar.com.my/news/story.asp?f...mp;sec=business

[Guest redharahmad]

His concern is AirAsia's derivatives position of selling call options at US$82.6 per barrel, which became effective at US$90 per barrel.

 

Nymex crude oil crossed US$90 a barrel on Oct 25 last year.

 

The position would have cost AirAsia about US$50 a barrel and should have made its impact in the last quarter but did not, the analyst said.

 

As such, the market was expecting some impact in the first quarter ended March 31, he said, adding that the amount was “quite large'' but did not elaborate.

 

That said, AirAsia has taken opposite positions to offset the shorted calls at US$82.6 per barrel, so costs on fuel hedging would not be so high, but some net costs were still expected.

 

However, on the flipside, if crude oil prices were to fall below US$90 a barrel, AirAsia was expected to “gain doubly” from having lower direct fuel costs as well as gains from trading derivatives, the analyst said.

 

http://biz.thestar.com.my/news/story.asp?f...mp;sec=business

 

Pardon my ignorance, but how exactly do airlines hedge their fuel? What are derivatives and call options? I am having difficulty trying to comprehend the point being made there.

 

Hope someone can enlighten me. Thanks.

 

[Naim 6]

Pardon my ignorance, but how exactly do airlines hedge their fuel? What are derivatives and call options? I am having difficulty trying to comprehend the point being made there.

...

 

Good question.

 

Pls read these series of excellent articles from The Edge:

 

http://www.theedgedaily.com/cms/content.js...96a4c0-7258ad34

http://www.theedgedaily.com/cms/content.js...96a4c0-d68f88f0

http://www.theedgedaily.com/cms/content.js...96a4c0-89fb2031

http://www.theedgedaily.com/cms/content.js...ebe180-18dac1fe

 

[Mohd Azizul Ramli 2]

Nomad Investment substantial shareholder in AirAsia

The Star, Thursday May 29, 2008 MYT 11:58:25 AM

 

KUALA LUMPUR: AirAsia Bhd, whose share price fell recently, saw Nomad Investment Partnership L.P. emerging as a substantial shareholder with 120 million shares.

 

A filing with Bursa Malaysia showed the Cayman Islands-registered fund raised its stake to 5.05% after acquiring 1.2 million shares or 0.05% on Monday,

 

AirAsia’s share price fell to a 52-week low of 98.5 sen on Wednesday while its 52-week high was RM2.14 on Oct 26 last year.

[Mohd Azizul Ramli 2]

I think their share price will goes up tomorrow. Higher quarterly net profit than MH!!! (although 30% of it are contributed by deferred tax)

 

AirAsia Q1 net profit at RM161.27m

The Star, Thursday May 29, 2008 MYT 5:47:08 PM

By Joseph Chin

 

 

KUALA LUMPUR: AirAsia Bhd’s net profit for the first quarter surged ended March 31 surged to RM161.27mil from RM86.87mil, boosted by deferred taxation of RM51.54mil and higher passenger volume. Announcing the results Thursday, the low-cost carrier said group profit before tax improved by 156% to RM110.17mil from RM43.07mil a year ago in 1Q07. Revenue rose 32% to RM535.15mil from RM406.22mil a year ago. Earnings per share was 6.8 sen from 3.7 sen.

 

“The positive growth in results was attributed to higher passenger volume achieved and higher contribution from ancillary income,” it said. AirAsia said passenger volume rose by 21% in Q1 from Q1 last year. Average fare was higher by 10% at RM189 as compared to RM171 achieved a year ago.

 

“The higher average fare achieved reflects the robust demand for our services and maturity of certain routes in the network,” it said. It said the load factor was 4.4 percentage points lower to 72% due to significant capacity addition, initial underperformance of new routes and some routes experienced decline in load factors due to specific local issues such as snowstorms in China.

 

On the outlook, it said the airline industry was facing one of the toughest challenges, with record jet fuel prices, tightening of the credit market and a slower world economic growth.

 

“A consumer slowdown is not necessarily a bad thing because low cost carriers traditionally benefit from a consumer slowdown. Passengers who would normally take a full service carrier are likely to trade down and fly with a low cost carrier,” it said. AirAsia said it was driving this consolidation process as it continued to offer irresistible fares, stimulate new markets, encourage price sensitive customers and expand to new destinations.

 

“No one is certain how long this situation will persist, but it is inevitable that weaker competitors will have to reduce capacity and disappear eventually. In this period of uncertainty, there is only one assurance – and that is low cost airline will prosper,” it said.

 

AirAsia said in the end, it would emerge “even stronger reflecting our brand, our sound business model, our unmatched cost advantage, efficient fleet, strength of our route network and our hardworking people”.

[Guest redharahmad]

Good question.

 

Pls read these series of excellent articles from The Edge:

 

http://www.theedgedaily.com/cms/content.js...96a4c0-7258ad34

http://www.theedgedaily.com/cms/content.js...96a4c0-d68f88f0

http://www.theedgedaily.com/cms/content.js...96a4c0-89fb2031

http://www.theedgedaily.com/cms/content.js...ebe180-18dac1fe

 

 

Thanks Naim! I think I now understand what the fuss is all about, so let me try and recapulate in layman's terms.

 

In short,

 

1) Most airlines hedge just by buying the option to purchase fuel at a predetermined rate in expectation of a rise in fuel.

Eg. Airline A buys the option to buy fuel at US$80 a barrel for the next one year because it expects fuel to rise beyond that within the same period. Hence,

any rise in fuel price beyond that would mean cost savings for the airline as it can still get fuel for just US$80 a barrel.

 

2) AirAsia however, is not just hedging fuel but also speculating fuel prices by being a 'fuel supplier' via its decision to sell call options at US$82.60 a barrel effective at US$90 a barrel. This means that when fuel rise beyond US$90 a barrel, whoever bought the call options from AirAsia have the right to purchase fuel from AirAsia at US$82.60 a barrel.

 

3) So, depending on how much AirAsia pays for the fuel they purchase currently, they could theoretically be suffering huge losses with the sale of each barrel of fuel to the purchaser of the call option. And at a market rate of US$135 a barrel, AirAsia's loss coud be as much as US$50 a barrel.

 

4) This 'call option' thing is just a written agreement that the buyer buys. This agreement allows the buyer to purchase fuel at US$82.60 a barrel should fuel rise beyond US$90 a barrel, while simultaneously binding the seller (AirAsia) to sell fuel at that price to the buyer.

 

5) So unless AirAsia has other agreements or has bought call options that allows it to currently purchase fuel at prices below US$82.60, they would be making losses for each barrel of fuel sold under the terms of the call option that they sold off.

 

So, there you go. Hope I got it right

 

 

 

[KK Lee 5]

 

 

If AK realised their mistake earlier, they could buy option from the market to limit their losses, which what they claimed they did.

 

Depending on accounting policy, they can defer this losses until it is exercised, think this is what they are doing.

 

It is estimated may loss up to RM100 million per year in the next few years. RM 100 million is about 30% to 60% of their profit before tax, which won’t send them to bankruptcy but depress their share price.

 

AK should focus on transporting customers from A to B, not betting on oil price.

 

 

[BC Tam 2]

Lou Lee & Dr Naim & Mushrif,

You guys are probably more conversant in the in's and out's of number crunching - by looking at past AK financial reports, is it possible to discern whether previous declared profits can be attributed to this 'non-core' business activity ?

Interesting

[Mohd Azizul Ramli 2]

Additional news from The Star

 

AirAsia Q1 earnings surge to RM161mil

Friday May 30, 2008

 

Reviewing the results, the airline said the positive growth was underpinned by higher passenger volume and bigger contribution from ancillary income. Passenger volume rose 21% to 2.61 million from 2.16 million previously.

 

“Average fares were higher by 10% at RM189 compared with RM171 in the first quarter of 2007,” it said, adding that the higher average fare reflected robust demand for its services and the maturity of certain routes in the network.

 

On its fuel requirements, AirAsia said it had hedged part of its needs for the second quarter, enabling it to save about US$10mil (RM32.23mil) in the second quarter. Thereafter, it would remain unhedged and buy fuel at spot market rates.

[Naim 6]

Lou Lee & Dr Naim & Mushrif,

You guys are probably more conversant in the in's and out's of number crunching - by looking at past AK financial reports, is it possible to discern whether previous declared profits can be attributed to this 'non-core' business activity ?

Interesting

 

Thanks, BC, but sorry, sir, me no numbers-bloke.

 

 

...

In short,

 

1) Most airlines hedge just by buying the option to purchase fuel at a predetermined rate in expectation of a rise in fuel.

...

 

I guess that sounds about it, sir. The issue is that AK is exposing itself to significant risks in a non-core business, which spooks some investors.

 

LATEST ... of course lah ECM Libra wants ppl to buy the stock.

 

AirAsia Shares Gain in Malaysia After Oil Price Drops (Update2)

 

By Soraya Permatasari

 

May 30 (Bloomberg) -- AirAsia Bhd., Southeast Asia's biggest discount airline, rose the most in two months in Kuala Lumpur trading after the price of oil dropped and the company reported higher earnings.

 

The stock climbed 3 sen, or 3 percent, to 1.04 ringgit at the 5 p.m. local time close of trading, the biggest increase since March 25.

 

Crude oil fell more than $4 a barrel in New York yesterday, the biggest drop since March. The carrier yesterday said it will buy fuel at spot market prices after the second quarter.

 

``Their share price performance has an inverse relationship with the movement of crude oil prices, so they rose after crude fell,'' said Yong Chin Siong, an analyst at ECM Libra Securities Sdn. in Kuala Lumpur who recommends investors buy the stock.

 

The cost of fuel, the carrier's biggest expense, surged 67 percent last quarter from a year earlier. That limited profit growth as the carrier flew 21 percent more passengers. Net income in the quarter jumped 86 percent to 161.3 million ringgit ($50 million).

http://www.bloomberg.com/apps/news?pid=206...&refer=home

Edited May 30, 2008 by Naim

[Azri M. 0]

03-06-2008: Slide continues at AirAsia

by Jose Barrock

Email us your feedback at fd@bizedge.com

 

KUALA LUMPUR: The shares of low-cost carrier AirAsia Bhd continued to slide yesterday on the back of negative news flow.

 

Deutsche Bank yesterday reduced its target price for AirAsia’s stock to RM1.05 per share or down 16% from its previous target. This comes on the back of several other downgrades by both international and local research outfits, which have revised their take on AirAsia largely because of rising oil prices.

 

Kenanga Investment Bank, meanwhile, reduced its target price for AirAsia to 95 sen in line with the budget airline’s net tangible asset per share. Kenanga Investment Bank also reduced FY2008 and FY2009 core net profit projection by 58.7% and 62.5% to RM65.4 million and RM94.8 million, respectively.

 

Much of the negative sentiment was centred on high oil prices, coupled with increased competition from national carrier Malaysian Airlines System Bhd (MAS), which could pressure near-term performance. MAS has come out with a sub zero fare campaign, which rivals AirAsia’s low fare model.

 

For the three months ended March this year, AirAsia raked in RM161.3 million in net profits from RM535.2 million in revenue. In contrast to a year ago, net profits gained by 86% while revenue improved 32%. However, Kenanga adds that core net profit of AirAsia is RM23.5 million (excluding a foreign exchange gain of RM86.2 million) which is only 14.9% of Kenanga’s forecast for AirAsia.

 

AirAsia’s stock ended trading at RM1.16 yesterday, the same level as its initial public offering (IPO) which took place in November 2004. Year-to-date, AirAsia shares have shed about 37%.

 

Much of the fall in AirAsia’s stock price has been in tandem with the steep increases in fuel prices.

 

Overall sentiment for the airline industry has also been weak, fuelled by International Air Transport Association chief executive officer Giovanni Bisignani’s statement that traffic growth in the industry could be at best 3.9% this year from 5.9% in 2007.

 

He also forecast industry-wide losses of US$2.3 billion (RM7.4 billion) this year if crude oil prices were to maintain at US$107 this year, and losses of US$6.1 billion should oil prices maintain at prices of US$135 per barrel.