AirAsia (Part 2): Now Everyone Can Fly

Just to be clear, I'm bullish

• 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 post-dilution normalized PE ratio of only 6.2x.

• In my view AirAsia is dramatically undervalued, assuming they survive the pandemic. However given the large uncertainty involved, a small position is recommended.

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Background: Current Business Landscape

In September 2020, I came up with an bullish investment thesis on AirAsia. I highly recommend that you at least skim through those slides first, as the below analysis is a follow-up to that. You can read the thesis in its entirety here: https://valueinvesting.substack.com/p/airasia-buy-or-die

Since then, life has turned upside down for AirAsia; and then turned upside down again. As expected, the pandemic environment has not been a pleasant one for airlines globally. In November 2020, the first covid vaccines were announced by Pfizer, Moderna and AstraZeneca, which have since been distributed across most of the developed world and to a lesser extent the developing world. Airline executives globally breathed a collective sigh of relief.

And then just as things were starting to look brighter again, a new wave swept across the world after the original covid strain ravaged India, and gave birth to the variant-of-concern now known as the ‘delta’ variant. Cases suddenly spiked across the world as the one-two punch of the variant’s mutations made it 3x more transmissible, with Malaysia (AirAsia’s HQ) being no exception - at one point, new local daily COVID cases per million people exceeded even India’s.

Prior to this, Malaysia’s new daily cases had actually been stabilizing somewhat, and domestic inter-state border restrictions had been lifted which allowed flying. Domestic tourism was in fact seeing somewhat of a boom, as pent-up demand and the lack of international tourist destinations drove a near-recovery in domestic travel volumes. However, new local cases suddenly and unexpectedly started spiking into the stratosphere in April, and by end-May the government had reinstituted harsh nationwide lockdowns again.

Obviously, this was not good news for AirAsia. Many investors of the airline felt that its survival was predicated on domestic flights providing much-needed cash flow - and if covid could flare up so unpredictably and lockdowns re-implemented without warning, what did their future look like? With only about 15% of the local population having received their first dose of vaccination as of today (compared to the USA’s 50%), the inside of the crystal ball into AirAsia’s future prospects resembled a raging snowstorm.

However, it wasn’t all bad news for AirAsia. In February, a prominent Hong Kong businessman by the name of Stanley Choi appeared as a substantial shareholder, acquiring nearly 9% of its shares by early March through a private placement. In addition, AirAsia’s CEO Tony Fernandes revealed in a recent podcast that the status of a syndicated bank loan of RM 1.0 bil (USD 240 mil) which had been in the works since mid-2020 would be getting an update “very soon”.

AirAsia’s share price has risen nearly 40% in the 9 months since my last analysis

So what do I think about AirAsia’s share price today, which has risen by nearly 40% since my last writeup? As Buffett once said, “In the business world, the rearview mirror is always clearer than the windshield”. So let’s grab that divine squeegee and try flexing our prophetic muscles, shall we?

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Overview of AirAsia's Current Liquidity/Cash Flow Situation

Snapshot of AirAsia’s selected line items (FY19-20)

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