Why Airasia X IPO doesn’t make any sense – Case Study Review

This is an article I posted June 2013, before the IPO of Airasia X 

The company IPO at RM1.25 per share and currently trades at around RM0.77 per share, a 38.4% decline.

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Why Airasia X IPO doesn’t make any sense

Tony Fernandes is god! I have to admit, I am a big fan. Who isn’t? What’s not to like about this guy? Having been a long time shareholder of Airasia (AA), when you attend the Airasia AGM, you will realize, most people buy the stock, mainly because of him. The Aura is exciting, the aura is contagious, and the aura is dangerous… And that’s why, you should still read the first page of the prospectus of Airasia X (AAX) before writing your cheque.
A simple maths. Airasia X is currently running 11 aircrafts, experimenting with the mid to long haul business model. A model, which most people will agree, less profitable than short haul. After IPO, we can expect AAX to have a market capitalization of around RM 3.5billion

Airasia, currently operates nearly 150 aircrafts, highly profitable, still growing in a business model proven to work. Market capitalization of RM 8.8billion.

So…. A company at 1/14th the size of Airasia, toying with an unproven business model. One would assume the value of the company should also be around 1/14th (even alittle lesser than that I might argue) the size of Airasia. However, the IPO valued AAX to be 40% the size of Airasia.

Which can lead us to a few conclusions.

1)    Airasia X is Fairly valued, which means Airasia is wildly undervalued, which means you should buy Airasia!

2)    Airasia X is Undervalued, which means Airasia is even more undervalued, which means you should buy Airasia over Airasia X!

3)    Airasia X is Overvalued, which mean Airasia might also be overvalued, which means you should not buy either.

None of the conclusions give us a reason to buy AAX, but why is everyone still so excited over it? I am not saying that you will lose money in AAX, market is irrational, and it can stay that way for a long time. But I hope you will not buy AAX and claimed that you have made an investment, you have merely made a gamble.

I will leave you with something to ponder, “If AAX is so amazing, why are they selling?”

* Above article is only an expression of opinion from the writer and not a recommendation or advice on investment. Investment is about making a bet, while knowing your RISK. Gambling is about making a bet, and assume you will win.

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Latest update

Airasia X has just fell into losses this quarter, as it is involved in a damaging price war against Malaysian Airline System.

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim owns shares in Airasia Bhd.

 

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