Stockwatch: AirAsia’s shares up
~ 18 Jun 2015Short sellers put AirAsia in the crosshairs
~ 18 Jun 2015GMT Research: AirAsia/Noble/Abenomics
~ 17 Jun 2015Bursa Malaysia: AirAsia's latest business updateAirAsia’s Malaysia CEO buys shares after critical report
~ Aireen Omar, who replaced the founder of Asia's largest budget carrier Tony Fernandes to head its Malaysia operations in 2012, bought a total of 45,000 shares worth 78,300 ringgit ($20,841), according to the filing. ~ 17 Jun 2015Weak earnings quality for AirAsia on unsustainable income
By Sharon Kong
17 Jun 2015
AirAsia Bhd (AirAsia) has been viewed by analysts as having weak earnings quality on the back of aggressive depreciation policies and unsustainable income from interest income on dues from associates and joint ventures (JV).
AllianceDBS Research Sdn Bhd (AllianceDBS Research) reviewed its thesis, and identified several concerns about the group’s earnings quality.
Firstly, the research house noted that AirAsia’s depreciation policies seem aggressive vis-à-vis its peers.
“We are wary of AirAsia’s aggressive assumptions with regards to the group’s depreciation policies on its aircraft fleet,” it said.
AllianceDBS Research noted that AirAsia assumes that its aircraft (i.e. engines and airframes) have useful life of 25 years and residual value of 10 per cent.
“This implies that AirAsia recognises an annual depreciation rate of only 3.6 per cent for the aircraft, which is at the lower end of the peers’ range of 4.5 to 6.3 per cent,” it said.
The research house found such assumptions to be odd as AirAsia typically plans to use the aircraft for only up to 12 years and the fleet has a higher utilisation rate vis-à-vis the group’s peers.
“One might argue that depreciation policies are management’s responsibility, and since auditors have cleared the financial statements, the aggressive depreciation assumptions should not be an issue.
“Additionally, there are those who would say depreciation is not a cash item, and investors should overlook this issue and focus on cash returns,” it said.
However, the research house disagreed as an aggressive depreciation policy fundamentally distorts the earnings quality (not matching revenue with the economic costs of using the asset) and could lead to future losses when the aircraft are eventually disposed.
Already, AirAsia had recognised a RM38.6 million provision in the second quarter of FY15 (2QFY15) for aircraft that the group intends to dispose in the near-term.
“Previously, management guided that it could recognise a disposal loss of RM141 million for the disposal of 12 old aircraft,” the research house said, adding that this works out to circa RM12 million disposal loss per aircraft.
Meanwhile, AllianceDBS Research noted that recognition of interest income on amounts due from associates and JVs, which made up 22 per cent of core net profit in 1Q15, has helped AirAsia to prop up bottomline.
The research house said that finance income rose 41 per cent/nine per cent in FY13/14 despite a 38 per cent/three per cent decrease in cash holdings, as it was bolstered by the eight per cent interest rate which was charged on balances due from associates.
“In 1QFY15, this amounted to RM32.9 million, or 84 per cent of the group’s total finance income,” it added.
Given the challenges in collecting the amounts due from associates, AllianceDBS Research thought the recognition of interest income on these amounts would be a distortion on earnings quality, as these will not likely lead to any cash inflows in the near term.
It was concerned of the impact on earnings quality, as interest income made up 21.5 per cent of core net profit in 1QFY15 (versus 8.5/21.4 per cent in FY13/14).
Collectability of interest income aside, the research house thought the current level of interest income will not be sustainable going forward.
AllianceDBS Research noted that the amounts due from associates are expected to fall going forward, as IAA and PAA will undertake pre-initial public offering (IPO) funding and repay RM1 billion of the sums owed to AirAsia, while the remainder owed will be converted into equity.
As such, the research house expected the interest income charged on these amounts to fall in tandem.
*****************************************************************************************************************************AirAsia meets investors to allay fears
By Chester Tay
16 Jun 2015
KUALA LUMPUR: Top executives at AirAsia Bhd are rolling up their sleeves to explain to its institutional investors as they seek to allay fears raised by research firm GMT Research about the budget airline’s accounting and cash flow in a June 10 report.
“We have talked to our investors. It (the GMT report) is garbage and so, we will not comment [further],” AirAsia group chief executive officer Tan Sri Tony Fernandes told The Edge Financial Daily yesterday.
“Since when does an analyst put out a press release? It is kind of sad how one guy who wants to make money can short stock and create mayhem,” he said.
Last Friday (June 12), Hong Kong-based GMT Research issued a press statement on its website, announcing that it had written a report on AirAsia, questioning its accounting, profit generation, cash flow issues, leverage and group structure.
“We are in discussions with the company about our concerns. We published this report on June 10, but it is embedded in our password protected website for the benefit of our paying subscribers. We have a press embargo until June 24,” it added.
GMT Research went on to say that it was not a short seller, but an accounting research firm licensed by Hong Kong’s Securities and Futures Commission.
However, the report continued to spook investors yesterday, sending shares in AirAsia falling to a new closing low of RM1.79 in five years, its lowest since Sept 15, 2010 when the counter closed at RM1.71 per share.
According to an analyst who has seen the report, GMT Research’s main concern was the method AirAsia had applied to account for losses from its associates.
“GMT Research basically was concerned that it (AirAsia) had understated losses by its associates,” he told The Edge Financial Daily.
AirAsia’s share price has been on a downtrend since last Monday (June 8) from RM2.14 to close at RM1.81 last Friday. Yesterday, it hit a low of RM1.74 in intraday trade before closing at RM1.79, with 13.86 million shares done. Its market capitalisation stood at RM4.98 billion.
The stock has lost 34% of its value since the beginning of this year.
Another analyst, who declined to be named, said the fall in AirAsia shares was also triggered by weak sentiment in most Southeast Asian stock markets.
“The (GMT Research) report is definitely not positive for AirAsia,” he said.
MIDF Research’s fund flow report yesterday said foreign investors have now been net sellers on Bursa Malaysia for seven consecutive weeks. Last week alone, foreign investors offloaded RM852.7 million, against RM926.1 million sold in the week before.
In his note to investors last Friday, Mohshin Aziz said issues raised by GMT Research were nothing new, and the analyst community had already deliberated them meticulously.
“Nonetheless, the market panic has set in. We take the view that AirAsia’s fundamentals are intact and maintain our ‘buy’ call,” he said.
“We are confident that AirAsia’s domestic operations will perform well, buoyed by better supply-demand balance and the restructuring at Malaysian Airline System Bhd. Be brave and accumulate for a profitable trade,” Mohshin added.
AirAsia’s foreign substantial shareholders include US-based Wellington Management Group LLP with a 13.97% stake and Scandinavia-based Skagen AS (5.06%).