AirAsia shares drop to five-year low

AirAsia Bhd’s (AirAsia) shares tumbled to the lows of RM1.73 region yesterday over concerns about overdue payments by related parties.

At closing it reached RM1.81 with 33.09 million shares traded.

Nevertheless, AirAsia Bhd’s (AirAsia) fundamentals has been viewed as intact and its operations are expected perform well, buoyed by better supply-demand balance and the restructuring at Malaysian Airlines, analysts
say.

Despite being the weakest performing Asia Pacific airline stock for the week, the research arm of Maybank Investment Bank Bhd (Maybank IB Research) remains confident that AirAsia’s Malaysian operations will perform well; buoyed by better supply-demand balance.

It also pointed out the restructuring at Malaysian Airlines will provide significant benefits to AirAsia.

Meanwhile, AirAsia saw its share price declining during the week, due to talks of an independent report that accuses AirAsia of accounting anomalies and values the company at RM1.20 per share.

“None of the issues raised in the report is new and we and the analyst community have already deliberated it meticulously. Nonetheless, the market panic has set in,” Maybank IB Research commented.

“We believe AirAsia’s accounts are transparent and Pricewaterhouse Coopers (PwC) is a respectable auditing firm.

“The auditors have approved the latest 2014 accounts without any qualification. Separately, we have always highlighted our concerns regarding the RM2,862 million owed by related parties – some of which are overdue.

“These are mostly aircraft lease payments owed to the parent in addition to working capital,” the research team added.

It retained its ‘buy’ call for the stock as well as its earnings forecasts and target price of RM2.45 (pegged to nine-folds FY15 price earnings ratio, 30 per cent discount to global LCC average).

It noted, “We have conducted a worse-case scenario analysis, which are to write off the loans to related parties.

“This is to establish a floor valuation for the stock.

“The total loan to related parties was RM2,862 million as at end of March-2015. This equates to RM1.03 per share or 61 per cent of shareholders equity.

“Assuming the entire amount is written off – an outcome that we deem improbable – this will cut shareholders equity to RM1,804 million or a book value (BV) of RM0.65 per share.

“This will also push up AirAsia’s net gearing level to 6.1-folds from 2.5-folds currently, surpassing the previous peak of 4.4-folds during the stormy 2008 global financial crisis (GFC).

“At such stretched levels, it may potentially trigger debt covenants and become an impediment to future borrowings.”