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Friday, May 30, 2008

The Edge on AIRASIA

AIRASIA announced its Q1/08 earnings results last night.
Not surprisingly, The Edge carries an article on AIRASIA. (full article here - http://www.theedgedaily.com/cms/content.jsp?id=com.tms.cms.article.Article_37d9b33a-cb73c03a-18992130-69b8fc44) I must say I was very amused with its very impressive title "AirAsia 1Q net profit surges 86%".

After all, 86% growth is pretty impressive headline isn't it?

However, I should caution you that since AIRASIA's earnings results were already discussed in my chatbox in depth and quite passionately earlier today, I was personally not impressed with the number.


Because there were many reasons. But the simplest reasons are the Net Profit figure of $161M (or 86% growth over $87M prior year) includes the contribution of one-time foreign exchange gain of $86M, as well as a deferred tax item reported to be $52M in Q1/08.

(if you don't know where I obtain both numbers $86M and $52M, it is actually readily available from Bursa announcement. See below).

Simplistically, the Foreign Exchange Gain is what I would regard as an "exceptional item". Meaning, it is not normally regarded as a sustainable source of profit. In other words, it is not realistic to expect this source of profit (or loss) to continue indefinitely in every future years. So, most analysts exclude them in trying to understand its longer-term earnings position, because they can sometimes be positive or negative, but the normal expectation is that in the long run, they even out.

As for the Deferred Tax, well, this is a taxation item that in my opinion, is not directly related to the day-to-day management of AIRASIA (such as passenger loads, fare sizes, etc), but a taxation item. If I were to look at the strength of its business numbers, then, I would probably want to also consider the position Before Taxes for a balanced view.

So, if I were to take out both items from the $161M Net Earnings, then, I'm left with Q1/08 Net Earnings of $161M - $86M - $52M = $23M.

What? Only $23M?

I don't know about you, but $23M in 1 Quarter for a coy the size of AIRASIA with a market capitalization of $2,500M seems small. Some analysts would disagree with this analysis, saying that Q1/08 earnings hardly matters since AIRASIA is an explosive growth company, and the earnings in the initial years are going to be small. I have a different opinion, but here is not the place to discuss this view in detail.

But rather, my main point in writing this article is to observe and examine how a reputable business newspaper like The Edge would report AIRASIA's latest results. In particular, will it refer to the One Time Foreign Exchange Earnings of $86M? Will it refer to the Deferred Tax of $52M? Or will it just sensationalize AIRASIA's Net Profit figure of $161M?

What do you think?


30-05-2008: AirAsia 1Q net profit surges 86%
by Lim Shie-Lynn

KUALA LUMPUR: AirAsia Bhd’s net profit for its first quarter ended March 31, 2008 (1Q08) surged 85.6% to RM161.28 million from RM86.87 million a year earlier on the back of a 31.74% jump in revenue to RM535.16 million from RM406.23 million. The increased earnings were due to the low-cost carrier enjoying higher passenger volumes and fares.

Passenger volume grew 21% in the first quarter, while the average fare was 10% higher at RM189 compared with RM171 a year earlier. “The higher average fare achieved reflects the robust demand for our services and maturity of certain routes in the network,” AirAsia said in a statement to Bursa Malaysia yesterday.

AirAsia’s seat load factor for the current quarter had declined 5% to 72% from 77% a year earlier on significant capacity addition, initial underperformance of new routes and some routes experienced decline in load factors due to specific local issues such as snowstorms in China.

It also said the Thai operations had improved since it received five new Airbus A320 aircraft as passenger flows had increased while load factors edged higher with better yields.

“The Thai operations produced earnings before interest, taxes, depreciation, amortisation and rent (EBITDAR) margin of 7% in the current quarter. The management is confident that Thai AirAsia is in the right path to capture passenger growth, enhance efficiency with the Airbus A320 aircraft and produce consistent profits,” it said.

Its Indonesian operations had made improvements on its passenger flow following its route network reorganisation exercise. However, it added that the rise in fuel prices affected Indonesian operations severely as the company was operating with Boeing 737-300 aircraft.
“The Indonesian operation is due to receive the Airbus A320 aircraft in the later part of the year, and economic benefits of the A320 aircraft will soon be enjoyed by the Indonesian (operations),” it said.


So, how?

What did you think of the reporting by Lim Shie-Lynn on AIRASIA's latest earnings?

Should one goes out and buy AIRASIA just because The Edge says that its Q1/08 Earnings has surged by 86%?

And what about the reason for the 86% growth - "The increased earnings were due to the low-cost carrier enjoying higher passenger volumes and fares"

Is the main reason for the increase really due to higher passenger volumes and fares? Or is it due to the increase in Foreign Exchange Gain? And the increase in the Deferred Tax?

Personally, I was very dissappointed that Lim Shie-Lynn did not refer to the existence of the One Time Foreign Exchange Gain of $86M.

Further, I was dissappointed that the writer didn't consider the Before Tax position also, to provide some insight into its business operations results.

Whilst the article mentions a lot of details - passenger volume, average fare, robust demand, maturity of certain routes, seat load factor, capacity addition, under-performance of new routes, Thai operations, Indonesia operations, blah, blah, blah - it failed to mention the 2 most important items (to me) in Q1/08 earnings, which is One Time Foreign Exchange Gain of $86M and Deferred Tax of $52M.

So, how?

Are both items simply not important in explaining the 86% growth?

Should / can one trusts newspapers without independent analysis?

For that matter, should / can one trusts any analysis by anyone (who may or may not have vested interest) without independent analysis?

On this note, I wish you Happy Investing.


Disclaimer: I do not have either long nor short positions in AIRASIA. You buy/hold/sell at your own risks.


Salvatore_Dali said...

lol, good and fair comments... yes, the edge articles standard has been dropping... as I have highlighted the nonsensical rumour-mongering on no basis...

donplaypuks® said...

This kind of misleading reporting seems to be happening everywhere.

Proton announced $202 million profit, but if you remove 1 off Govt Grant of $192 milion and deferred tax, they just about broke even i.e. Zero profit.

There was a time when accounting standards required companies to distinguish between Operating Profit Before Tax and Exceptional/ 1 Off Profit items such as sale of company assets etc.

I don't know why the KLSE & SC do not insist anymore on these Plcs announcing results that show ordinary maintainable profits instead of lumping it with exceptional and extra-ordinary gains and deferred tax write-backs.

Whatever spin you want to put on it, the Management of these Plcs are out to obfuscate and mislead the investing public!!