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AirAsia Gets Nod For Biggest Malaysia IPO This Year
Malaysia's first budget carrier AirAsia Bhd. (AIA.YY) has received the green light for its initial public offering, which is set to be the biggest share offer in the country this year - possibly raising up to 1.05 billion ringgit ($276.3 million), according to estimates from people familiar with the deal.
The IPO will be closely watched as it is the first by a budget airline in Southeast Asia, a region that is fast catching on to the idea of low-cost carriers and no-frills travel. The offer will also be an indicator of investor interest in aviation plays at a time when the industry is grappling with rising fuel prices due to surging oil prices.
Late Thursday, AirAsia said it has obtained regulatory approval for an IPO of 700.5 million shares, or about 25% of its existing share capital. In its statement, AirAsia didn't say how much it expects to raise from the share offer, but people familiar with the deal expect the company to raise between MYR875 million and MYR1.05 billion. That would make AirAsia's IPO the biggest share offer in the country this year, following KLCC Property Holdings Bhd.'s (5089.KU) MYR766 million offering in August.
"We believe that a listing status will allow us to grow and strengthen our position as a leading low-fare, no-frills carrier in Southeast Asia," Group Chief Executive Tony Fernandes said in the statement. AirAsia said it will officially name the underwriters for the offer on Tuesday (Oct. 12). A prospectus is expected later next week, a banker close to the deal said.
Thursday, AirAsia said 560.4 million shares, or 80% of the shares on offer, will be sold to local and foreign institutional investors via private placement; 116.8 million will be offered to the public; and 23.4 million will be allocated to employees and business associates. AirAsia's shares will likely be priced at a range of MYR1.25 to MYR1.50, according to people close to the deal.
TOO PRICEY FOR SOME
While analysts are expecting a good response to AirAsia's IPO from retail investors, largely due to the company's aggressive advertising efforts and marketing savvy, they say institutional investors may be less enthusiastic about the stock.
Since starting up under its current management in early 2002, AirAsia has blazed a trail for other low-cost carriers in the region, with its bold advertisements and promotions offering dirt-cheap tickets for a limited number of seats.
Fund managers will be looking carefully at AirAsia's offer due to pricing and competition concerns, said an aviation analyst at a local bank-linked securities firm. "It's expensive, so those who want to make a first-day quick profit may do well to avoid this stock," he said, noting the limited upside for the shares based on the offer price estimates.
At the higher end of the estimated price range, AirAsia's offer translates to a price/earnings ratio of 20-21 times its projected earnings for FY2004-05. That is well above the 12 times national carrier Malaysian Airline System Bhd. (3786.KU) is trading at, and higher than the broader market's forward P/E of 13-14 times, analysts note.
Given that AirAsia and Malaysian Air will be keen competitors for many regional routes, investors are likely to compare the two, and AirAsia would be viewed as too pricey, considering its less-established status, analysts say. Another analyst notes that European budget carrier RyanAir, which debuted at a forward P/E of almost 30 times when it listed in Dublin in 1997, has since eased to around 14 times.
COST, COMPETITION CONCERNS
Valuation aside, growing competition in the region for a bigger slice of the air-travel pie and rising costs due to soaring oil prices are key concerns for the budget airline, said a fund manager at a Kuala Lumpur-based fund-management firm.
Jet fuel is the biggest cost component for airlines, one aviation analyst points out. And AirAsia's "biggest advantage is that they have hedged 80% of their requirements up until FY06 (the company's fiscal year ending June 30, 2006) at $28-$35 a barrel," said the banker close to the deal.
In comparison, Malaysian Air only said earlier this week that its board recently approved raising the ceiling on its fuel hedging requirements to 80% from 50%. There are also concerns about AirAsia's growth outlook, given the slew of low-cost carriers emerging in Asia. "There are at least nine LCCs (low-cost carriers) in the region so AirAsia will be pushed hard to cut costs," said the banker close to the deal.
AirAsia Group Chief Executive Tony Fernandes has made no bones about the airline's intention to keep expanding at breakneck speed. The company now owns 22 planes, and Fernandes said last month in Beijing that it needs up to 80 more over the next four to eight years.
The company's 49:51 joint venture with Thailand's Shin Corp. (SHIN.TH), called Thai AirAsia, plans to fly to Kunming, China in December from Bangkok, Fernandes said. This would make AirAsia the first budget carrier to break into the previously tightly controlled China market.
AirAsia is 73.41% owned by Tune Air Sdn. Bhd., of which Fernandes and AirAsia Chairman Pahamin Rajab are shareholders. Other AirAsia shareholders are IDB Infrastructure Fund L.P. with 10%, Crescent Venture Partners with 9%, Deucalion Capital II Ltd. with 7%, and Mofaz Sdn. Bhd. with 0.59%.
Kuala Lumpur
