Airasia: When fear reins supreme...

On the morning of June 11, I highlighted that Airasia had broken the RM2.00 psychological support and that it might test the RM1.80 support soon. The RM1.80 is a confluence of horizontal support, uptrend line support as well we the lower line of a downward channel. I believe that the stock should find its support at this level.

Of course, we now know that the RM1.80 support was not enough to hold back the rampaging bears spook by a report from a Hong Kong-based accounting research group GMT Research which questioned Airasia's accounting, profit generation, cash flow issues, leverage and group structure. I do not have the benefit of reading that report but I believe the gist of it has probably found its way into the AllianceDBS Research report, which was reported by Bloomberg TV (here).

In essence, the GMT Research report highlighted the following issues:

1. Aggressive depreciation policy which assumes a 25-year useful life and 10% residual value for its aircraft. This implies an annual depreciation rate of 3.6% vs its peers’ range of 4.5%-6.3% and it is likely to distort its earnings.

2. The collectability of the amounts owing by Indonesia AirAsia (IAA) and Philippines AirAsia (PAA), which rose from RM438.0 million in 1Q FY2010 (3.8% of total assets) to about RM2.8 billion in 1Q FY2015 (12.8% of total assets).

3.  Since the bulk of the amounts owing by IAA & PAA came from lease rental payable to Airasia, the eventual settlement of the amounts owing would deprive Airasia of a source of income, namely interest income from lease rental.

After adjusting for the above, AirAsia’s net profit would be 30%-35% lower than AllianceDBS Research’s current core net profit forecasts for FY2015-FY2017 (which is premised on AirAsia’s current accounting policies). Because of concerns about the recoverability of the amounts owing by IAA and PAA as well as Airasia's earnings quality, AllianceDBS Research trimmed its target price to RM1.80 after raising its sum-of-parts (SOP)-discount to 50%. It however maintains its HOLD rating on the stock.

Since Airasia broke its strong support of RM1.80 with such ease, one would be inclined to believe that the support from the horizontal lines at RM1.40 & RM1.20 would also likely to fail. While this thought may seem reasonable, we must remember that when the share price of a stock is sufficiently low, its underlying value would become obvious. Bargain hunting or greed would surface and the share price would recover. Would it happen at RM1.40 or RM1.20 or, even lower prices like RM0.80? Who knows? One thing is for sure: If you hang in there or bought into the stock today, and if the stock recovers in the future to, say RM1.80, the target price set by AllianceDBS Research, you deserve the profit. Of course, the grim alternative may also happen. The share price may continue to slide - remember AAX - and if you had exited earlier, your capital would be well-preserved for another investment. This is investing at its most basic -with guts and commitment.

Good luck! 


Chart: Airasia's monthly chart as at Jun 17, 2015 (Source: ShareInvestor)

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Airasia.