Tuesday, 13 November 2012

AirAsia X: IPO poses many questions

AirAsia X has registered its preliminary prospectus which can be found here on the website of the SC.

"Serious Investing" has written about it on his blog.

The total document has 492 pages in PDF-format, a huge amount that is very hard to digest but which is (unfortunately) quite common in Malaysia. It makes it hard to find the really important data.

Principal adviser is CIMB Investment Bank, which seems to have a virtual monopoly on large Malaysian IPO's. It has also borrowed money to AirAsia X, part of the proceeds will be used to pay back some of it.

AirAsia X is offering 790 million shares, rumoured to be priced around RM 1 per share. Almost 200 million of these shares are from existing shareholders, which seems strange, AirAsia X's balance sheet is weak and this company needs money, lots of it, so why not just issue new shares?

Strange start
"Our Company was incorporated on 19 May 2006 as a private limited company in Malaysia under the Companies Act under the name of Eden Hub Sdn Bhd. Our name was subsequently changed to Fly Asian Xpress Sdn Bhd on 1 June 2006. Our principal activities then were the operation of air services in the rural areas of Sabah and Sarawak (East Malaysia) until 30 September 2007. We changed our name to AirAsia X Sdn Bhd on 21 September 2007 …. We have been principally engaged in the business of providing low-cost, Long-haul air transportation services since November 2007".

The history of Fly Asian Xpress was rather controversial, its start (taking operations over from MAS), its operations and its sudden stop. Rather puzzling that no other information is given about this episode of AirAsia X. Some information regarding this issue on WikiPedia.

Also, the reason for starting AirAsia X is rather peculiar, why not operate this by a company fully owned by AirAsia?

And lastly, Tony Fernandes and Kamarudin were large shareholders and executive directors of AirAsia, so why would they want to start a new airline? Tony Fernandes and Kamarudin are now executive directors and relatively small shareholders of AirAsia and non-executive directors and relatively large shareholders of AirAsia X, a strange situation. Besides AirAsia and AirAsia X they hold each about 60 other directorships.

I have blogged before about the huge amount of Related Party Transactions (RPTs) between AirAsia and AirAsia X. Also the strange situation that the amount of money that AirAsia X pays to AirAsia is decreasing while its turnover is increasing. In Chapter 11 (PDF pages 214 to 236) dozens of these transactions are given.

From a CG point of view, this is (highly) undesirable. It would have made much more sense if AirAsia X was formed as a 100% subsidiary of AirAsia. It is still not too late to rectify that situation, AirAsia X shares could be swapped for new AirAsia shares and subsequently AirAsia could offer a right issue to strengthen its balance sheet.

The huge dependence of AirAsia X is described in sentences like:
"Our success also depends, in part, on our continued ability to use the AirAsia trade name and related trademarks in order to increase our brand awareness. If for any reason the "AirAsia X" trade name and related trademarks are withdrawn by AirAsia Berhad or become unavailable to us or we are required to pay a higher licence fee for the use of the AirAsia trade name and related trademarks, or should there be any other material changes to the Brand Licence Amendment and Renewal Agreement, whether as a result of a breach or otherwise, or in the event we are unable to extend the term of the Brand Licence Amendment and Renewal Agreement, our business operations and financial results would be adversely affected."

The Profit Before Tax (PBT) of AirAsiaX was:

2009:  -60m
2010:   98m (due to a foreign exchange gain of 144m)
2011: -131m
2012:  -36m (first 6 months)

That does not look impressive, to say the least, and that for a six year old company.

The only reason AirAsiaX still could book profits after tax was that it made us of aggressive accounting techniques (similar to AirAsia) claiming "deferred tax assets" of 247m. I don't like this accounting technique since it is not clear to me if AirAsia X is able to generate enough taxable income in the future.

This huge amount of deferred tax assets was just enough to claim retained earnings of 35m. Still a very low amount, given the fact that 480m has been invested in the company over a six year period. Quite amazing that a company with such a poor track record would be allowed to be listed on Bursa Malaysia.

Balance sheet:
The balance sheet has 2,389m assets and 1,872 liabilities, but again, this includes the 247m in deferred tax assets. Borrowings are 464m short term and 918m long term, and given the projected acquisition of airplanes (RM 13 Billion) it looks worrisome.

Current assets are only 224m versus current liabilities of 954m, meaning the current ratio is only 0.2, much too low. With the cash injection of the IPO the company might indeed survive, but without it things look rather bleak. The recent sale and leaseback of 2 AirAsia X airplanes might also give an indication of financial stress.

A company in this state, urgently needing money should not strive for a sky-high valuation. The total number of shares currently is close to 1.8 Billion, in other word pre-IPO the company is valued at about RM 1.8 Billion. Shareholders equity is 518m, which includes 247m deferred tax assets. The offer therefore looks very stretched, both from an earnings point of view (operational losses, even after six years) and a balance sheet point of view (excl. deferred tax assets).

It must also be noted that Virgin Group (Richard Branson) invested in AirAsia X in 2007, but did not participate in the subsequent rights issue in 2010, according to The Edge. Also, he sold his 10% of the company alledegledly for more than USD 21M, valuing the whole company at more than RM 650m.

AirAsia had an option to increase its current shareholding in AirAsia X, but strangely enough it decided not to execute that option. Its shareholding of AirAsia X will therefore drop to only 12%, hardly meaningful and below the 20% needed to call AirAsia X its associate.


  1. Hi MA,

    Things to ponder further;

    Prospectus – u can’t teach a lazy dog new tricks, especially it’s a trial & tested one in a cartel setup.

    Adviser – old dog? Info overload is a tried & used methodology to confuse Joe Publics & it's legal!

    Offer – a chance for someone to cash out, while there r still suckers(GLCs & GLFs) out there?

    Strange start – someone re-eningeered this as a milking machine, which turned sour along the way. So in come the flightboys of the day to do a turn around. See RPT bellow.

    RPT – check Offer above.

    Profit/Loss – someone is chicken out due to the accumulative losses. Make hay while the sun still shine.

    ‘Quite amazing that a company with such a poor track record would be allowed to be listed on Bursa Malaysia.’ - This tells u above the real power behind the company!

    Balance sheet – see Offer above. While trying to raise new fund to prolong a foreseeable head crash in a not-too-distance future, the original investors also want to take their cuts, before it’s all too late.

    Valuation – Richard is a cut throat businessman & that’s how he does business. T&M r learning fast. Do these people know something that the prospectus didn’t mentioned or try to hide under tons of information overload?

    In conclusion, avoid this share offer like plague.

  2. Don't worry. There is always the EPF.