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Fundamental Analysis for AIRASIA BERHAD

Fundamental Analysis: 68% BCompany Name: Board:

Stock Code (Bursa): FBMKLCI: FALSE

Bloomberg: Reuters: AIRA.KL

Industry: Stock Grade:

Sub-Sector:

Company Description:

Date of Analysis: Price: 3.34

Income Statement Analysis (2010):

Balance Sheet Analysis (2010):

Income Statement Analysis (Jun-11):

Balance Sheet Analysis (Jun-11):

Main BoardAIRASIA BERHAD

AIRASIA

AIRA:MK

TRADING SERVICES

Although debt as a percent of total capital decreased at AirAsia Bhd over the last fiscal year to 68.91%, it is still in-

line with the Airlines industry's norm. Additionally, there are enough liquid assets to satisfy current obligations.

Accounts Receivable are among the industry's worst with 7.94 days worth of sales outstanding. This implies that

revenues are not being collected in an efficient manner. Last, AirAsia Bhd is among the least efficient in its

industry at managing inventories, with 3.32 days of its Cost of Goods Sold tied up in Inventories.

AIRLINE / AIRPORT SVCES AND AVIATION EQPMT

Year over year, AirAsia Bhd has been able to grow revenues from 3.1B to 3.9B. Most impressively, the company

has been able to reduce the percentage of sales devoted to cost of goods sold, SGA expenses and income tax

expenses. All of these improvements led to a bottom line growth from 506.3M to 1.1B.

Since AirAsia introduced its low fare, no frills concept in December 2001, the airline

now flies to over 48 destinations in Malaysia, Thailand, Indonesia, Macau, China,

Investment Grade

Compared to the same quarter last year, AirAsia Bhd has been seen their bottom line shrink from 198.9M to

104.3M despite an increase in revenues from 933.4M to 1.1B. An increase in the percentage of sales devoted to

income tax expenses from -5.86% to 3.79% was a key component in the falling bottom line in the face of rising

revenues.

This company's capital structure relies on a level of debt that is comparable to the Airlines industry's norm, at

67.81%, which represents a decrease from the prior fiscal year. Additionally, there are enough liquid assets to

satisfy current obligations. Accounts Receivable are among the industry's worst with 7.40 days worth of sales

outstanding. This implies that revenues are not being collected in an efficient manner. Last, AirAsia Bhd is among

the least efficient in its industry at managing inventories, with 2.45 days of its Cost of Goods Sold tied up in

Inventories.

29-Aug-11

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Shareholding Analysis:

TUNE AIR SDN BHD is the major shareholder. EMPLOYEES PROVIDENT FUND BOARD is holding 6.14%.

Score Card - Fundamental Analysis

W R S

4 9 36

3 9 27

5 9 45

4 5 20

5 2 10

5 2 10

3 10 30

4 10 40

4 10 40

4 10 40

4 5 20

4 8 32

3 5 15

3 4 12

4 4 16

3 9 27

3 7 21

3 10 30

3 3 9

3 10 30

68%Overall Score

2.1. Strong brand, monopoly or barriers to entry

2.2. Gross Profit Margin (> 40%) & Net Profit

Margin (> 10%)

4.1. Working capital increase slower than sales

4.2. Short & declining "Cash Conversion Cycle"

4.3. Free Cash Flow / Sales > 5%

2.3. Consistently high ROE > 15%

5 - Management and Institutional Investors are Holding/Buying Stock

3.3. Current Ratio > 1

2.5. ROIC > 15%

3 - Conservative Debt

5.1. Management and Institutional Investors are

Holding/Buying Stock

3.2. Debt/Equity Ratio < 1

2.4. Able to deliver double-digit growth in next 3-

5 years

3.1. Long term debt < 4 times Net Profit

2.7. Potential Risks

4 - Healthy Cash Flow

2.6. Strong future growth drivers

This is due to business expansion.

1.4. Growing/consistent in revenue and net

profit in the last 5 quarters.

1.5. The current quarter's EPS is up more than

15% from the same quarter the year before.

2 - Sustainable Competitive Advantage & Strong Future Growth Drivers

1.6. EPS increasing in the past 5 quarters

Oil price in Q2 increased operating

cost and reduce the net profit. As oil

price dropping Q3, I foresee Airasia

will recover in Q3.

Item

1.1. Sales Revenue & Net Income After Tax

increasing in the past 5 years.

1.2. Net Cash from Operations increasing in the

past 5 years.

Remarks

1.3. EPS increasing in the past 5 years

1 - History of Consistently Increasing Earnings, Sales & Cash Flow

Market Timing

Buy Criteria

Applicable

Sell Criteria

Applicable

Criteria Remarks1. The current quarter's EPS is up more than 15%

from the same quarter the year before.

3. Price is below Intrinsic Value (20%)

2. Stock price breaks out of consolidation/dip on

an uptrend.

Criteria1. EPS decreasing in the past 3-5 quarters

Remarks

4. CU EY% > 6% (or at least more than FD rate)

5. CU DY% > 6% (or at least more than FD rate)

5. Found a better opportunity to replace this

stock

2. Stock price breaks out of long term uptrend.

3. Fundamental of business turns unattractive or

bad

4. CU EY% < 6% (or at least more than FD rate)

1.2. Net Cash from Operations increasing in the past 5 years.

1.3. EPS increasing in the past 5 years

Even if EPS growth is not trendy, but it is acceptable if 3-Y or 5-Y EPS growth rate is more than 15%.

1 - History of Consistently Increasing Earnings, Sales & Cash Flow

1.1. Sales Revenue & Net Income After Tax increasing in the past 5 years.

-1,000,000

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

2006 2007 2008 2009 2010

Total Revenue Net Income

-1000000

-500000

0

500000

1000000

1500000

2000000

2006 2007 2008 2009 2010

0.038

0.212

-0.211

0.206

0.384

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

2006 2007 2008 2009 2010

1.4. Growing/consistent in revenue and net profit in the last 5 quarters.

1.5. The current quarter's EPS is up more than 15% from the same quarter the year before.

EPS Growth: -47.22%

1.6. EPS increasing in the past 5 quarters

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Jun-10 Sep-10 Dec-10 Mar-11 Jun-11

Turnover Net Profit

7.2

11.9 11.5

6.2

3.8

0

2

4

6

8

10

12

14

Jun-10 Sep-10 Dec-10 Mar-11 Jun-11

EPS

1. Does it have a monopoly situation ? NO

2. Does it have a strong leading brand? Very Strong

3. Does it have a high barriers to entry? High

4. Does it have market leadership? Very Strong

Gross Profit: Sales Revenue:

Profit After Tax: Minority Interest:

Gross Profit Margin: 46% Net Profit Margin: 27%

LT Growth Rate: 21.04

2.4. Able to deliver double-digit growth in next 3-5 years

2 - Sustainable Competitive Advantage & Strong Future Growth Drivers

2.1. Strong brand, monopoly or barriers to entry

2.2. Gross Profit Margin (> 40%) & Net Profit Margin (> 10%)

2.3. Consistently high ROE > 15%

1,835,400 3,948,095

1,061,411 0

0

5

10

15

20

25

30

35

2004 2005 2006 2007 2008 2009 2010

2.5. ROIC > 15%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

2007 2008 2009 2010

Long Term Debt:

Long Term Debt < 4 times Current Net Earnings (After Tax): 6.25

Debt/Equity Ratio: 2.64

Current Ratio (MRQ): 1.56

3 - Conservative Debt

3.1. Long term debt < 4 times Net Profit

3.2. Debt/Equity Ratio < 1

3.3. Current Ratio > 1

6,637,400

4.2. Short & declining "Cash Conversion Cycle"

Free Cash Flow/Sales: -6.30%

4 - Healthy Cash Flow

4.1. Working capital increase slower than sales

4.3. Free Cash Flow / Sales > 5%

-200%

-150%

-100%

-50%

0%

50%

100%

2008 2009 2010

Revenue Growth YOY Working Capital Growth YOY

-20

-10

0

10

20

30

40

50

60

2007 2008 2009 2010

Cash Conversion Cycle

1. The current quarter's EPS is up more than 15% from the same quarter the year before.

EPS Growth: -47.22%

Estimated IV: 3.2 to 3.7

Discount from IV: -4.4% 9.7%

Discounted Cash Flows:

Dividend Discount:

Valuation by Estimated EPS and PE (Reuters):

Valuation by Price-to-book Ratio:

CU EY%: 11.50

CU DY%: 0.90

4. CU EY% > 6% (or at least more than FD rate)

5. CU DY% > 6% (or at least more than FD rate)

Market Timing

3. Price is below Intrinsic Value (20%)

IV: 3.7

Only paid dividend once.

2011: 5.63 (with the current economy

climate, this is too optimistic)

2012: 7.02

2015: 18.46

2011: 3.17

2012: 3.55

2015: 4.99

Valuation by Estimated EPS and PE (Self

Estimation):

3.09

Future Growth Drivers, Potential Risks and Analysts' Reports

Reported

Date

Subject Details Type Created Date

8/24/2011 AIRA MK, BUY, Upgrade Fv to

RM5.18 (from RM4.34), 1HFY11

Results Review

See attachment Analyst Report 8/24/2011

8/19/2011 AirAsia passengers up in July PETALING JAYA: The number of passengers carried by AirAsia

group last month rose 19.3% to 2.648 million from 2.218

million a year ago.

AirAsia Malaysia contributed about 58.2% or 1.54 million (a

12.1% year-on-year increase) of the group’s passenger traffic

in July, said AirAsia Bhd in a statement yesterday.

The group’s Thai and Indonesian units carried 567,100 and

541,220 passengers respectively in July, it said.

The load factor for the group rose by 3% year-on-year to 82%

while revenue passenger kilometres increased to 3.1 million,

up 20.5% year-on-year compared with 2.6 million a year ago.

Future Growth

Driver

8/19/2011

8/18/2011 AirAsia to charge RM10 check-in

fee

AirAsia will charge a RM10 check-in fee per passenger for all

the flights whose bookings are made from 21 Sept onwards to

check in via conventional check-in counters. The airline said

the additional charge is part of its plan to aggressively grow

revenue through ancillary income and services, instead of

transferring the full cost, amid escalating fuel prices, to its

passengers. However, the charge is not applicable for

passengers opting for self checks-in. The fees apply for all

AirAsia domestic and international flights originating from

airports in Malaysia. (Business Times)

Potential Risk 8/18/2011

8/16/2011 New AirAsia Philippines vows to

be ‘substantially’ cheaper

CLARK, Philippines: AirAsia launched a new affiliate in the

Philippines yesterday, promising to undercut its rivals on

regional and domestic routes.

To minimise costs and avoid Manila’s crowded terminals,

AirAsia Philippines will fly out of a former US air base that had

been turned into an industrial zone in Clark about 90 minutes’

drive north of the country’s capital.

“We will be substantially cheaper (than our competitors),”

AirAsia Philippines chief executive officer Marianne Hontiveros

said at the launch in Clark where she oversaw the arrival of the

airline’s first Airbus A320.

Future Growth

Driver

8/16/2011

8/12/2011 Up to RM1.2b cost savings for

MAS and AirAsia

PETALING JAYA: The collaboration forged between Malaysia

Airlines (MAS) and AirAsia Bhd on Tuesday can turn in up to

RM1.2bil in cost savings for both the airlines, said MAS newly

appointed executive director Mohammed Rashdan Mohd

Yusof.

“We have already identified savings in the area of

procurement, but I cannot tell you exactly where now ... but

the capital expenditures are large. We have basically looked at

a very detailed study done by Bain & Co and there are many

areas where we can cooperate and save,'' he said in an

interview with StarBiz yesterday.

Though these are preliminary figures and Rashdan's figures are

a bit conservative, others are more bullish to say the cost

savings could be as high as RM1.6bil.

An area that MAS will focus on to save cost is in aircraft

purchases, engines, spare parts purchasing. These are big

ticket items and AirAsia boss Tan Sri Tony Fernandes and his

partner Datuk Kamarudin Meranun have the expertise and

bargaining clout and “savings culture'' which MAS could

leverage upon.

Another area is on training where both can collaborate and

reduce redundancies to save cost.

“There are so many areas of collaboration like joint training

Future Growth

Driver

8/12/2011

8/9/2011 Analysts say MAS stands to

benefit more than AirAsia

PETALING JAYA: Although it remains to be seen if a proposed

share swap among key shareholders of Malaysia Airlines (MAS)

and AirAsia can save the former from its troubles in the long

term, MAS stands to benefit the most from the transaction.

Under the highly anticipated deal to be announced today,

AirAsia group chief executive officer Tan Sri Tony Fernandes

and his Tune Air partner and AirAsia deputy CEO Datuk

Kamarudin Meranun are expected to swap a portion of their

AirAsia shares for 20% of Khazanah Nasional Bhd's stake in

MAS.

Analysts said MAS would gain the most from this deal on an

individual stock basis, as MAS was coming off from a very low

base and given the negative investor sentiment as the airline is

expected to post full-year operational losses this year.

Standard & Poor's equities research analyst Shukor Yusof

attributed the gain to AirAsia's market position, expertise and

slick management.

“We think this is certainly the hope of Khazanah (in entering

such a deal). However, the cost differentials for Khazanah and

Tune Air suggest that the former will need to pay a premium

for AirAsia's stake based on its last closing share price, while

Tune Air will find the purchase of MAS stock relatively cheap.

“It seems like a sizeable gain for Tune Air's main shareholders

Future Growth

Driver +

Potential Risk

8/9/2011

8/9/2011 Rivals MAS and AirAsia to become

allies

PETALING JAYA: National carrier Malaysia Airlines and low-cost

carrier AirAsia Bhd's major shareholders Khazanah Nasional

Bhd and Tune Air Sdn Bhd will today announce a landmark

share swap deal worth just over RM2bil which will turn the

long-time bitter rivals into collaborating partners.

According to sources, under the share swap deal, Khazanah

will acquire a 10% stake in AirAsia from Tune Air, a private

vehicle controlled by Tan Sri Tony Fernandes and Datuk

Kamarudin Meranun.

As at July 6, 2011, Tune Air owned a 26% stake in AirAsia.

Sources also said Khazanah was in talks to acquire a 10% stake

in long haul low cost carrier AirAsia X but this would be

announced at a later date.

As part of the agreement, a source said MAS would issue new

shares to Tune Air which would end up with a 20% stake in the

national carrier. Khazanah, which has a controlling stake of

69% in MAS, will continue to remain the single largest

shareholder in the national airline after the exercise.

The source added that MAS, which was in dire need for fresh

capital, would also make a rights issue very soon.

The valuation of the swap will be based on the recent share

price of both companies as the exercise involves non-

controlling stakes. Trading in both counters are suspended

Future Growth

Driver +

Potential Risk

8/9/2011

8/9/2011 Oil price falls to lowest for this

year

NEW YORK: Oil plunged to its lowest price of the year Monday

on concerns about the slowing global economy and future

demand for oil and gas.

Benchmark West Texas Intermediate crude fell $5.57, or 6.4

percent to settle at $81.31 per barrel on the New York

Mercantile Exchange. That is the lowest settlement price of

the year for crude, but it's still higher than the $71.63 per

barrel low of the past 12 months. Oil hit that on Aug. 24 of last

year, when a combination of disappointing economic news

and abundant supplies drove down prices.

Future Growth

Driver

8/9/2011

8/2/2011 AIRASIA EXPLAINS USE &

FINANCING FOR 200 UNITS OF

AIRBUS A320NEO AIRCRAFT

AIRASIA which on Jun 23, 2011 ordered 200 units of

AIRBUS200 A320Neo aircraft valued at US$18.5 bil said that

the new aircraft would cater for markets in the Philippines,

Indonesia, Thailand, Vietnam and other joint venture

initiatives. " .... We will still have a lot of growth for our

Malaysian operations and there should be no shortage as to

where to put the planes ....." he told THE STAR in a phone

interview.

The delivery of the 200 planes is expected between 2016 to

2026. AIRASIA has the capacity to take up to 500 aircraft. " ....

With the trajectory of 500 aircraft, it will make us one of the

biggest airlines in the world ...." he added.

With the new order, AIRASIA is the world's biggest airline

customer for AIRBUS for the single aisle A320 family with an

order for 375 aircraft to date. So far, 89 A320s have been

delivered.

The order was bigger than the US$16 bil purchase for 180

aircraft from India's INDIGO.

FUNDING FOR PURCHASES

On funding, FERNANDES said that it would not be any different

from the others that the Company had funded previously. " ....

We have strong cashflow. To fund this new order is a function

of cash generation and debt financing. By the time these new

ones come in, many of the A320s would have been paid .... We

have been taking 16 to 18 aircraft a year and we were then a

smaller company ...." he said.

Future Growth

Driver

8/8/2011

7/21/2011 AirAsia Japan Joint Venture AirAsia Berhad (“AirAsia” or “the Company”) is pleased to

announce that the Company will today be executing a

Shareholders Agreement (“the Agreement”) with All Nippon

Airways Co., Ltd (“ANA”) of Japan.

The Agreement is formalised for the purpose of forging a joint

venture cooperation between AirAsia and ANA to establish a

low cost airline in Japan based on the successful AirAsia

business model (“the Joint Venture”). The company to be

incorporated in Japan for the Joint Venture is named AirAsia

Japan Co., Ltd. (“AirAsia Japan”).

Future Growth

Driver

7/30/2011

7/7/2011 AirAsia boosts plane order AirAsia Bhd will buy an extra 100 Airbus A320neo jets, taking

its record-breaking order to 300 planes, a source said.

The deal will make the budget airline one of the world’s largest

carriers.

The two sides announced a US$18.2bil deal for 200 planes at

the Paris air show last month, shattering aviation records for

the largest ever airline order. The additional order takes the

list price of the contract to a staggering US$27bil.

The bumper order highlights Airbus’ growing lead over Boeing

and throws the spotlight on AirAsia’s aggressive growth plans

at a time when high oil prices and an uncertain global

economy are clouding the outlook for travel demand.

Analysts expect the extended order to drive AirAsia’s

expansion as it competes with carriers such as India’s IndiGo,

Singapore’s Tiger Airways and Australia’s Jetstar.

“AirAsia had the first-mover advantage and it continues to stay

ahead of the game by ordering fuel-efficient planes and

keeping the size growing,” said an aviation analyst with a

Malaysian investment bank who declined to be identified due

to company policy.

“But the key risk is if expansion plans do not succeed. The

Malaysian base is fairly saturated, so if the other markets do

Future Growth

Driver +

Potential Risk

7/30/2011

6/27/2011 AirAsia the best for third year in a

row

AirAsia has been named the world’s best low-cost airline for

the third consecutive year, according to London-based aviation

consultants, Skytrax.

Future Growth

Driver

7/30/2011

6/23/2011 PURCHASE OF 200 AIRBUS A320

NEO AIRCRAFT BY AIRASIA

BERHAD

AirAsia Berhad (“AirAsia” or “the Company”) is pleased to

announce that it has signed a Purchase Agreement with Airbus

S.A.S (“Airbus”) to purchase two hundred (200) Airbus A320

NEO aircraft (“A320 NEO Aircraft”).

With the purchase of the A320 NEO Aircraft, the aggregate

total of AirAsia’s aircraft order for the AirAsia Group including

the current A320 aircraft will be three hundred and seventy

five (375) aircraft orders comprising one hundred and seventy

five (175) firm orders of the current A320 aircraft and two

hundred (200) firm orders of the A320 NEO Aircraft.

The A320 NEO Aircraft shall be equipped with set of a new

engine type developed by CFM International called the LEAP-

X1A26 engine (“the LEAP-X Engine”). In respect of the LEAP-X

Engine, the Company has also signed a Purchase Agreement

together with the Rate per Flight Hour Agreement for engine

maintenance services (collectively “the LEAP-X Engine

Agreements”).

The A320 NEO Aircraft Purchase Agreement and the LEAP-X

Engine Agreements were signed in Paris on 23rd June 2011.

Future Growth

Driver +

Potential Risk

7/30/2011