Highlight Dull debut but AirAsia X may be long-term bet

Highlight Dull debut but AirAsia X may be long-term bet
Business & Markets 2013
Written by Cindy Yeap
Friday, 02 August 2013 12:12

The uninspiring performance of AirAsia X Bhd in the first week of its debut last month on the local bourse could give the market some lessons on pricing an IPO and how first-day price jumps are not a sure thing for even a big name.

Despite the IPO being priced 20 sen or 13.8% lower than the initially indicated RM1.45, shares of Tan Sri Tony Fernandes’ long-haul budget carrier still ended flat at RM1.25 on its maiden trading day on July 10.

While the humdrum close meant AirAsia X’s trading debut was the second worst on Bursa Malaysia over the past 12 months and was a stark contrast to Fernandes’ public persona, it was not entirely a surprise to investors familiar with the group.

“The AirAsia group has always priced itself to get the highest value, so I think the opening is more or less within expectations. Tune Ins Holdings Bhd, for example, didn’t move much initially but prices started to improve in the longer term, so I’d expect a similar trend for AirAsia X,” says Choo Swee Kee, chief investment officer of TA Investment Management Bhd, which owns some AirAsia X stock.

Moreover, most IPOs try to price themselves as close as possible to fair value. “If that process were to work, then normally one does not expect to have a big [price] jump on IPO day. Why should promoters sell low when there’s strong demand?” Choo adds.

It is worth noting, though, that like Tune Ins, AirAsia X hired a stabilising manager to manage the initial price performance of its IPO. Other large IPOs, such as MSM Malaysia Holdings Bhd and IHH Healthcare Bhd, also hired stabilising agents.

As AirAsia X’s stabilising agent, Maybank Investment Bank Bhd (Maybank IB) can buy up to 15% of the number of shares AirAsia X sold at IPO within the first 30 days of trading. And together with the greenshoe option — the option to buy additional shares from promoters at IPO price — the bank can increase or decrease the supply of shares to avoid large price fluctuations in the initial trading periods. Because of the market intervention, sceptics say the so-called “real” price levels for a newly listed stock are only seen after the stabilising period ends.

But experts like Choo say the presence of stabilising agents does not guarantee a newly listed stock will not fall below its IPO price. He reckons it is “still early” to say if AirAsia X would slip below its IPO price after stabilising action ends, as in the case for Tune Ins in February before appreciating to RM1.92 on July 11, about 40% above its RM1.35 IPO price and RM1.36 first-day closing.

“Stabilisation happens in the first month. Speculators and flippers are usually out within that first month, so market price should be better reflective after that,” Choo says.

It is not immediately certain how big a difference the stabilising action was to AirAsia X’s stock price. At the time of writing, Bursa filings show Maybank IB bought 19.5 million shares on AirAsia X’s first trading day — 2.5% of the 118.5 million shares it is allowed to buy from the market.

Stock market data shows most investors were willing to sell at RM1.26 and RM1.27 apiece on the first day and only 254,800 shares were sold at the IPO price of RM1.25.

Tock Chin Hui, head of equities at Manulife Asset Management Services Bhd, also thinks it is early days yet but believes some of AirAsia X’s price weakness stemmed from concerns over broader issues like the tapering of the US quantitative easing (QE) programme.

“Fundamentally, AirAsia X appears to have found the right formula to make the low-cost long-haul model work. The strategy of focusing on scale and market leadership in countries or markets and routes which are already profitable seems right,” she says, flagging oil prices as the “key risk” for AirAsia X.

TA’s Choo, meanwhile, thinks investors should not be rash in equating AirAsia X with billionaire Ananda Krishnan’s pay-TV concern Astro Malaysia Holdings Bhd, which also closed flat on its maiden trading day last October.

“Astro and AirAsia X have different business models, growth prospects and value propositions,” Choo says, noting that while both companies have sizeable near-term capital commitments to secure growth, growth prospects for AirAsia X look more promising as there are still viable and underserved routes in the region.

“Astro already has half the market and there were questions over how successful it could grow further, whereas a long-haul low-cost carrier is a new concept and the entire industry is still growing,” he replied when asked about the 22 planes AirAsia X will take delivery through to 2017 and the minimum of 10 more from 2018.

“New growth companies, in the initial stage, will need a lot of capital. Earnings may not come in yet and margins are thin. Whether earnings come in later depends on management’s execution of strategy,” Choo adds.

Whatever the case, Fernandes seems unfazed by the stock price performance of the company he co-founded with Datuk Kamarudin Meranun, judging by his Twitter post on July 10: “AirAsia started as a 25-cent company now worth 3 billion. AirAsia X as a 5 million company now 1 billion. Tune Insurance worth 400 million from ten”.

By pricing itself 20 sen apiece lower at RM1.25, the total IPO proceeds raised by AirAsia X fell below the RM1 billion mark and meant promoters and the company took home RM39.5 million and RM118.5 million less respectively.

Still, that 20 sen adjustment gave it one up over billionaire Ananda Krishnan’s pay-TV concern, which not only closed flat on the first day but slipped below IPO price on its second trading day last October. AirAsia X ended two sen up at RM1.27 on its second day of trading and RM1.26 on July 12.

Whether AirAsia X’s stock will fly higher depends on whether the company can continue staying profitable and be living proof that there is a business case for a long-haul low-cost carrier.