What Is AirAsia's Share Price Worth in the Post-Covid Environment?

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Some friends were asking me about AirAsia’s valuation after their recently announced issuance of convertible notes (expected to be issued by Dec 10). Below was my reply to them:

These are my valuation assumptions for AirAsia's post-dilution PE based on normalized earnings. Normalized earnings simply refers to their average earnings from FY10-19.

The estimated dilution approximately = actual dilution up to today, so no need to reinvent the wheel over that. You can verify it for yourself if you'd like, it amounts to about RM 1.5bn in new equity issuance.

The actual issuance price is actually higher than my estimate above. I estimated RM 0.65 (as in the pic), while the actual average price which the dilution took place at should be closer to RM 0.75. So there's actually less dilution then what I earlier estimated.

Based on those assumptions, my post-dilution PE based on normalized earnings was only 4.6x (as in the pic). Obviously there was bankruptcy risk involved when I made that slide in Sept 2020. Today the share price is about 50% higher at around RM 1.00, but there's also significantly less bankruptcy risk today. You can adjust the model further for your own assumptions.

Keep in mind AirAsia is the lowest cost carrier in ASEAN, purportedly the next China - in the highly commoditized airline industry, where the only thing that matters to customers is price. Feel free to determine for yourself what the appropriate PE should be with that kind of growth potential.

Cash burn was roughly RM 100m per month throughout the pandemic when their planes were grounded. They're back to flying now. Everything else is subjective, e.g. speed of recovery.

Other regional airlines may have cheaper fares than AirAsia, but cheaper fares can be different from cheaper costs. It’s possible for competitors to dump their prices below operating costs in an unsustainable manner, e.g. the e-commerce sector today. Also AirAsia’s 2019 financials were affected by the sale-and-leaseback of their planes (one-off), if you back that out they should be in the black for FY19.

Check out the slide above in my original AirAsia research reports below!

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AirAsia - Buy or Die?
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AirAsia: Now Everyone Can Fly
In this article, we’ll try to unpack how much cash runway AirAsia has remaining, and what their possible next moves might be. All else being equal, the company appears to have 5-8 months of cash remaining before considering any equity funding. However, the share price is so depressed that even the estimated 44% shareholder dilution needed to raise the budgeted RM 1.5 bil will still result in a…
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