15 June 2008

Why I'd never worried about AirAsia's debt.

One of the reasons that investors don't like AirAsia is the huge amount of CAPEX and borrowings.

In this article, I'll discuss how good is AirAsia in managing its debts.

1. Interest rate hedge

Interest rate hike is a essential risk for highly debted company. AirAsia hedges against the risk by entering into interest rate swap contract that will convert almost all of its debt into fixed rate debt.

According to its Dec-2007 report, AirAsia’s swap contract obliges it to pay fixed interest rate of between 4.78% and 4.90% instead of being subjected to the floating US-LIBOR for the entire loan amount over the entire tenor.

The hedging of interest rate will stabilize AirAsia' future cash flow, and help it to maintain the current low interest rate throughout the whole repayment period.

2. Forward foreign exchange hedge

As the borrowings of AirAsia are all in USD, it will benefit from the depreciation of USD. Moreover, Airasia had entered into forward exchange contracts for settlement at fixed Ringgit rates when the USD had depreciated.

For example, as disclosed in Dec-2007 report, AirAsia had swap its RM3.3 billion equivalent debt into ringgit at exchange rates between RM 3.000 ~ RM 3.369. Because the exchange rate of USD to Ringgit is much higher when it borrowed the money, AirAsia is actually making a profit from the repayments of principal loan amount.

These profits from foreign exchange had been recorded in AirAsia’s income statement. In the latest quarterly reports, we can see that the financial cost of AirAsia is a positive value (which means it’s an income, not expenses). This is because the foreign exchange gain from the repayment of debt is higher than the interest expenses.

The following table shows AirAsia’s interest expenses & foreign exchange gain during pass two years.

foreign exchange gain

And the most important part is, these exchange profit are recurring! (because AirAsia had swapped its debt into ringgit at a favorable rate.) With this recurring income, I never doubt the ability of AirAsia to pay the interest of its loan.

3. Tax Incentive

AirAsia has been granted a great amount of tax incentive from our government, for its CAPEX in purchasing aircrafts.

How much is the tax incentive? Let’s look at the recent figures.

Tax incentive

From my own estimation, for every dollar AirAsia spent in purchasing aircrafts, the tax incentive incurred is enough for it to pay the loan interest for at least 3 years! As the repayment period of AirAsia’s loans are only 12 years, the tax-incentives had actually helped to cover a substantial part of its financial cost.

So, why not borrowing?

Let’s look at this tax incentive from another angle of view. The following table shows the PBT of AirAsia and the tax it should have paid if there’s no incentive:


And the actual taxes paid by AirAsia during this period are:

  • FY2006:RM 2.2 million.
  • FY2007:RM 5.1 million
  • July-Dec 2007:RM 1.5 million

Can you see how much tax savings had AirAsia been enjoying? This a main reason why I've never worried about the high CAPEX of AirAsia.

In fact, the fast expansion of AirAsia, leveraging on financing facilities, is one of the factors that enable AirAsia to maintain its profitability. Because in the highly competitive LCC industry, only the lowest cost player (through effective cost reduction, economic scale, and fast penetration into the market) will survive and prosper.

Since it's able to manage its debts so well, I think AirAsia's way of expansion (through borrowings instead of issuing new shares) is the best way to benefit the shareholders without diluting our interest in the company.


[updated 29-10-2008]: There's a serious mistake in this article -- the foreign exchange gain reported in AirAsia's income statement is not a real gain. Though I don't know the exact figure, I'm quite confident that AirAsia's actual (recurring) exchange gain/losses should be much smaller than the figures stated in this article. For more detail, pls read my post: Profit of AirAsia (part 1).


10 June 2008

Comment about Mar-2008 quarterly reports


The result is better than I expected. Its operation in Indonesia and Thailand is improving despite the escalating oil prices. The environment for airline industry has become more and more challenging in this year. The record-high oil price and tough competitions in the industry will kick out some of the players, and those who survive——and I think AirAsia is surely one of the them——will benefit from it.

As I said, I will gradually increase my investment in AirAsia (up to the limit of 25% of my portfolio’s value). Currently, the only thing that worried me is the continuous drop of AirAsia’s load factor, which is about 68% in this quarter. However, I’m in confidence that it would be improved in next year, as a result from the ASEAN's sky liberation.


It surprised me with a proposal to sell off the businesses in Paramount Discovery. Its acquisition of Paramount Discovery about two years ago is one of the main reasons I invested in AKN. However, the proposed selling price of RM126.9 million is about four times higher than the acquisition price about two years ago. This means AKN will have a gain of about RM100 million in this transaction, which is equal to earning per share of about 80 sen.

This will help AKN to reduce its debts, cut the financial cost (hence improve its profitability), and achieve a healthier balance sheet. I hope these will boost AKN share price to a high level after the transaction is done, because I’m considering to withdraw my investment from AKN then.


The revenue and profit remain stable, as expected. Its reaction to WSIA remains uncertain. The scheduled tariff hike in Jan-2009——which is expected to boost its profit next year by at least 30%——remains the key reason for me to hold RUBHD.

But then a shockin news was announced last week, that Ranhill Berhad made a take-over offer on RUBHD. The offer price is only RM3.50 per share, which is 20% below its NTA. I really hope that this privatisation will fail, because RUBHD definitely worth much more than RM3.50!


Revenue and profit is growing as expected. But the profit margin is decreasing, which is a warning signal to me. Although I feel that its current share price is very cheap as compared to its value, I'll rather stop accumulating Supermx. This is simply because the value of Supermx already made up a high percentage in my portfolio (about 25%). Currently, I need some diversification in order to reduce the risk of making mistake.


As expected, Titan remain profitability despite the high oil price, and the polymer-naphtha spread is quite stable. I’m very happy to see the start-up of the butadiene plant and propylene plant has been carried out smoothly. Also encouraging is the increasing output from the Indonesia’s plant. The next step of Titan is the debottlenecking process of its polypropylene plant, which is expected to boost its Polypropylene capacity for another 100 KTA, by the end of this year.

"Value-Stocks" Portfolio - TAFI & ADVPKG

Advpkg had declared a tax-exempt dividend of 4.5 sen per share. This means I’m enjoying a net dividend yield of about 8% this year, which is higher than I expected. Maybe due to this higher dividend, its share price has been advance for more than 20% from my buy-price. However, I’m in the opinion that its current share price of about 70 sen is still under-valued.

Despite the declining revenue and profit,TAFI's share price remain quite stable.

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