UNIT OF STUDY : BAO5734 FINANCIAL ANALYSIS

ASSESSMENT 3 – ANALYST REPORT

AIR ASIA BHD

Group Assignment Members :

1. Cheang Wai Leong 4184704

2. Chua Yong Chin 4312445
3. Harvinder Kaur Baldev Singh 4124234
4. Teh Choy Yit 4312599

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Table of Content

Topic Page

Introduction 3

Business and Strategic Analysis

- Analysis of The Economy, The Industry, and The Company’s Position 3

- Company’s Competitive and Corporate Strategy 5
- Situational Analysis – Porter’s Five Forces Analysis 5
- Company’s and The Industry’s Growth Potential 7
- Implication of All of These For Its Future Profitability 8

Governance and Accounting Analysis

- Analysis of The Company’s Accounting Policies 8

- Comparison To Those of A Similar Company In The Same Industry x

Financial Analysis

- Time Series Analysis For Both Companies x

- Analysis of The Company’s Overall Financial Position x

Prospective Analysis

- Sales and Earnings Forecasts x

- Reasons For Major Assumptions x
- Valuation of The Company x

Recommendations x

References x

Appendices

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Introduction

Air Asia (AA) was formed in 1996 by DRB-Hicom and never made money and finally sold to Tune Air in
2001 after the 1997 Asian Financial Crisis. Lead by current CEO Tony Fernandas with a few partners in
Tune Air, they bought the company for RM1.00 with 2 Boeing 737-300 aircraft as well as close to 40
million debts.

We are to examine the success story of AA, what have they done and where will they be in the future.

Business and Strategic Analysis

Analysis of The Economy, The Industry, and The Company’s Position

Malaysia ranked as 29th largest economy in the world by purchasing power parity with gross domestic
product (GDP) of USD492.4 billion and per capita GDP at USD16,922 and is the third largest economy in
South East Asia behind the more populous Thailand and Indonesia (World Bank 2013). GDP was growing
rapidly at an average of 8% annually during the 1980s and 1990s and continue to grow at an average of
5% in 2000 to 2012, contributed mainly by high level of private investment by both domestic and foreign
investors, focusing in manufacturing and services industry and driven by Vision 2020. The forecasted
GDP growth rate is 5% for 2013 to 2016 (World Bank) driven by consumer spending.

Of the 6 million Malaysian households average income, 9% is less than RM1000, 50% is between
RM1000 ~ RM3000, 36% is between RM3001-RM999 and 5% is above RM10,000 (Statistic Department
Malaysia 2010), resulting in a large middle income group. In 2010, Malaysia capital market crossed the
RM2 trillion thresholds for the first time since independence, indicating the growth of economy
especially in financial sector towards the realization of Vision 2020. The positive macro economy growth
and increasing disposal income (Statistic Department Malaysia) increased the purchasing power of
consumers.

The following chart shows that air passengers carried in Malaysia (both domestic and international
flights) in 2010 was more than 26mil, compared to 16.5mil 10 years ago for aircrafts registered in
Malaysia. This indicates high growth of nearly 6% yearly, faster than average GDP growth rate of 5%.

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AA did a survey back in 2001 and found out that there are only 6% of Malaysian experienced air travel,
whether for business or leisure.

Some of the reasons why air travel penetration rate is so low :

Firstly the cost of traveling is extremely high compared to other mode of traveling. A return air
ticket to Penang or Johor Bharu could cost a thousand Ringgit! Most of the public cannot afford to travel
by plane.

Secondly, there is no aggressive marketing promotion program organize by airline operators,

thus the awareness to travel by air is very low, never a top of mind mode of transport for local travel,
especially leisure travel.

Thirdly, the destination network is not as complete as today. For example there was no direct
flight to Sandakan back then and must transit via Kota Kinabalu.

Cost leadership is the strategy of the Air Asia (AA). In 2002, the “re-born” AA launched a one way air
ticket price of RM39 from KL to Penang, cheaper than a bus fare at that time! Tagline for the company is
“Now Everyone Can Fly” with a company vision of “Continue To Be The Lowest Cost Airline In Every
Market We Serve, Delivering Strong Organic Growth Through Offering The Lowest Airfares At A Profit”.

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Company’s Competitive and Corporate Strategy

Clearly, AA is adopting Product Focus as corporate strategy and Cost leadership as competitive strategy.
AA sustained their low cost strategy by :

1. Using one standard aircraft model to reduce maintenance complexity and cost (standard spare
parts leads to lower inventory)
2. Constantly renew aircraft fleet, keeping a younger fleet to reduce maintenance cost that grows
with age of airplane
3. Landing at low cost terminal and minimal use of airport facility (eg : aerobridge) to keep
operational cost down
4. Shorten landing turn-around time to maximise aircraft utilisation per day
5. Eliminate the travel agent ticketing fee by promoting on line purchase
6. Make ground/air crew multitasking to save labor cost
7. Reduce flight carrying weight by on demand inventory carry (pre-ordered in flight food and
shopping stuff) to reduce wastage and fuel cost
8. Adopt flat organization structure to reduce unnecessary expenses
9. Recruited matured and experienced flight crews to ensure smooth start up and low training cost
during those few critical years in start-up phase

AA corporate strategy is to focus in low fare air services but also expand into businesses that
complement the air travelers such as low cost hotel, telecommunication, insurance, on-line shopping
and air cargo service.

Situational Analysis – Porter’s Five Forces Analysis

In order to examine the competitive advantage of the company as well as the current situation, we are
using Porter’s Five Forces for the situational analysis :

1. Rivalry Among Existing Firms

Although no local competitor locally but there are afew within the region like Tiger Airways (TA) and Jet
Airways. In this scenario, price is the basis of competition. While every low cost carrier is promoting low
fare, there is a way to continue grow the company via blue ocean strategy – a strategy that make
competition irrelevant by recruiting people who have not been travelling by air, stay true to its slogan of
“Now Everyone Can Fly”. The regional hubs allow better connectivity for AA compared to Tiger or Jet

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Airways. However, switching cost to another competitor is relatively low because of the nature of on
line ticket purchase and technology proficiency.

2. Threat of New Entrants

Treat of new entrant within Malaysia is low even though people impression of Firefly is a low cost carrier.
In fact Firefly is positioned as a community airline with lower price than Malaysia Airlines. However, we
could not deny there is potentially other new low cost carrier establishing within Malaysia, for example
Malindo Air. It all depend on the government policy whether to issue new license to compete in this
highly competitive aviation industry.

3. Threat of Substitute Products

The threat of substitute products such as taxi, bus, train or ship is moderate because of the fare offered
by AA is not expensive and easily offset by the convenient and time saving if one were to travel the said
distance. Shorter travelling time and comparable ticket cost are main draws for business and leisure
travelers to choose Air Asia.

4. Bargaining Power of Buyers

The level of price sensitivity is high and this lead to the high level in bargaining power of the buyers. The
buyers could easily compare various fares on line before decision is made. They can easily switch to any
airline just in a couple of minutes.

5. Bargaining Power of Suppliers

There are only 2 major passenger aircraft manufacturers in the world : Boeing and Airbus. However, the
supplier may not hold critical bargaining power over AA because AA is able to play a volume game in this
case at the initial stage. However, once the supplier (in this case is Airbus) knowing that the low cost
strategy of AA is to adapt a single aircraft model then the bargaining power of the supplier will increase.

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Company’s and The Industry’s Growth Potential

The company was expanding fast from first operational year of 250,000 passengers in 2002 to 33.8
million passengers in 2012. Passenger growth was 13% in 2012. AA expanded rapidly by :

1. Increasing passenger volume

- “Now Everyone can fly” pricing strategy increased overall penetration rate of
usage of air travel & frequency of flyers.
- Geographical expansion captures markets with big population, many of whom
never flew before and many locations never had frequent air service.
- Captures passengers from other mode of transport and passengers from other
airline.
- Helped to create an expanded low cost Rest & Recreation segment as more
Asian finds themselves affordable in having a holiday overseas (4 hours
distance) within the region.
2. Connectivity within 4 hours regional hubs
- Connectivity between major hubs of KL, Bangkok, Jakarta, Manila and their
respective local country routes allows further travelling into smaller /satellite
within a country, boosting passenger volume.

3. Building strong brand equity

- High usage of print and digital media to announce promotions and new
destinations, generated great customer awareness.
- Generated other associated sales opportunities – Hotel, Tour, Mobile,
Merchandise.
4. Geographic expansion
- Besides domestic destination, Air Asia also aggressively expands into other
ASEAN countries China, India, Australia and England.
- This gives a huge potential growth in the long run as the markets where Air
Asia is penetrating contributed one third of the world population.

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Implication of All of These for Its Future Profitability

From 2 aircrafts in 2001, today, AA has more than 118 aircrafts (272 by 2015) and operates in more than
20 countries and 120 destinations. The company has covered most of Asia countries and as well as
Australia, and penetrating into Middle East and Europe.

The future growth potential is still strong by looking at where AA is operating and plan to operate. Other
than ASEAN countries with 620 million populations, AA is penetrating the 1.2 billion populations China
and 1.3 billion population Indian markets. They are also exploring in Europe and Australia. Other than
the core business of passenger air flight service, AA also expanding Air Cargo service, flight insurance,
hotel, telecommunication, on line shopping, to complement their core business.

Governance and Accounting Analysis

Analysis Of Air Asia Group’s Accounting Policy

A company’s Accounting Policies are basically procedures a company uses to prepare their financial
statements which goes to show whether the company is conservative or aggressive in reporting their
earnings (Investopedia 2013).

Generally, companies are expected to adopt important accounting policies such as accrual accounting,
historical cost, conservatism and materiality. The review on the comparison between Air Asia Group’s
(AA) accounting policies with its competitor Tiger Airway’s (TA) accounting policies here is conducted
looking at their 2012 Annual Reports. Just to highlight, AA’s financial statements are prepared according
to the Malaysian Financial Reporting Standards, International Financial Reporting Standards and the
Malaysian Companies Act 1965 (Air Asia Annual Report 2012). Whereas TA’s financial statement is
prepared according to Singapore Financial Reporting Standards (Tiger Airways Holdings Limited Annual
Report 2012). AA’s financial year ends every 31st December whereas TA’s year end is 31st March every
year.

AIRASIA GROUP (AA) 2012 (RM) TIGER AIRWAYS (TA) 2012 (SGD)
Passenger Seat Sales 3,255,612 500.1
Aircraft Operating Lease Income 534,873
Surcharges And Fees 378,685
Other Revenues 384,779 118.1
Baggage Fees 392,142
Total 4,946,091 618.2

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 Difference in Total Revenue Earnings for AA and TA for year ending 2012
(Air Asia Annual Report 2012 & Tiger Airways Holdings Limited FY11-12 Results)

Revenue Recognition

Revenue is generally recognized when it is measurable and when there is an occurance of a particular
critical event (Investopedia 2013). Air Asia included brand licence and loyalty programme in their
revenue policy and they explained the interest income in much detail. In fact AA has precisely list down
its ancillary revenues for better understanding and calculates it net of discount. As for rental income, AA
records it on a straight-line basis and recognizes it on an accrual basis.

Inventories

Inventories turnover is one of the important sources of an organization’s revenue generation and
subsequent earnings. They are considered as important assets of the organization (Investopedia 2013).
According to AA’s Annual Report 2012, they state their inventories at the lower of cost and net
realisable value. Computation of cost by AA is determined on weighted average basis. The total cost of
available goods is divided by the total units available to arrive at average cost (Wikimedia Foundation,
Inc.).

Depreciation Property, Plant and Equipment

According to their Annual Report 2012, Air Asia Group uses the straight-line depreciation method to
calculate depreciation over the estimated useful life of the asset. Air Asia Group listed 25 years as their
aircraft useful life and showed a precise list of every of their property, equipment and vehicles together
with their useful life. In fact Air Asia also gave an estimated residual value for their aircraft engines and
airframes to be 10% of their cost.

Aircraft Maintenance and Overhaul Costs

AA amortizes the cost of major airframe and engine maintenance checks of the aircraft they owned over
the shorter of the period to the next check or the remaining life of the aircraft. For leased aircraft,
provisions are provided in the lease agreement and whereby estimated future costs in relation to
airframe and engine maintenance checks is calculated on the basis of hours flown.

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Air Asia Group Accounting Policy In Comparison To Tiger Airways Accounting Policy

Revenue Recognition

Compared to TA, AA’s Policy on revenue recognition is more comprehensive. AA included brand licence
and loyalty programme and explained in much detail their interest income in their revenue policy which
is not done TA. Compared to TA, AA has precisely list down its ancillary revenues which they calculate on
a net of discount. As for rental income, TA mentioned that it’s recorded on a straight-line basis but silent
on how it is recognized. AA on the other hand recognizes it on an accrual basis.

Inventories

Both AA and TA state their inventories at the lower of cost and net realisable value but however their
computation of cost varies. AA determines cost on weighted average basis. On the other hand, TA
determines cost on first-in-first-out basis. This means assets which produced first will be the first to be
disposed. This method has a few tax minimization strategies linked with it (Investopedia 2013).

Depreciation Property, Plant and Equipment

Both AA and TA uses the straight-line depreciation method to calculate depreciation over the estimated
useful life of the asset but however, AA listed 25 years as their aircraft useful life whereas TA mentioned
theirs is 23 years. TA’s list of property, equipment and vehicles together with their useful life is very
basic compared to AA. In comparison, AA estimated their residual value for their aircraft engines and
airframes to be 10% of their cost whereas TA estimated it at 15%.

Aircraft Maintenance And Overhaul Costs

In comparison to AA, TA pays fixed per hour rate to maintenance companies to maintain their aircraft
engines. Thus the maintenance expenditure comes under power-by-the-hour arrangements.
Management will estimate the monthly payment for engine overhauls and will defer the amount as
prepaid expenses until the actual overhaul. For leased aircraft, provisions are provided in the lease
agreement and both Air Asia Group and Tiger Airways have the same provision whereby estimated
future costs in relation to airframe and engine maintenance checks is calculated on the basis of hours
flown.

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Financial Analysis

Ratio Analysis

Financial Leverage

Referring to the Ratio Analysis Table in Appendix, a cross sectional and trend analysis had been done on
analysis the performance of Air Asia (AA) and its competitor, Tiger Airways (TA). AA has a higher Current
Ratio and Quick Ratio compared to TA. With both Current Ratio and Quick Ratio above 1, this indicates
that AA has a more liquid scenario whereby its current asset exceeds current liabilities and hence can be
easily convertible to cash. As both ratio had declined from 2010 to 2012, the liquidity level had declined
in trend. In addition, AA has a higher Cash Ratio than TA, indicating that it is able to repay its liabilities
with cash or marketable securities in case of emergency. A cash ratio of around 0.5 for TA is dangerous
as its cash is sufficient to cover only half of the liabilities. TA also has a negative operating cash flow ratio,
which indicates that the organization's operating activities mainly the sale of flight tickets does not
generate sufficient funds to repay its liabilities. This is critical as TA is using debt financing for its
operation and may lead to financial distress if it defaults on the interest and principal of the repayments.
There are no significant changes in Net Debt to Equity Ratio from 2010 to 2012 for both AA and TA,
however, TA has a higher Debt to Equity Ratio indicating a higher leverage with debt financing, which
leads to higher financial risk, thus, affecting future outcomes. AA has a high interest coverage ratio (both
earnings and cash flow base) and is increasing from 2010 to 2012 indicating a high capability in repaying
the interest from loan and other liabilities.

Margin Ratio and Common Sized Revenue Ratio

Next, the margin ratio highlights how profitable both companies are. With a low EBIT and EBITDA
margin in 2011 and negative value in 2012, any additional expansion on TA will not add value to
shareholder, as no dividend will be paid out. This is an opposite scenario for AA as AA’s EBIT and EBITDA
Margin doubled from year 2011 to 2012. NOPAT ratio of AA is higher indicating a higher profit
generated from sales in operating profit.

Based on the common sized revenue ratios, AA has a low cost of sales which reflects a higher
operating efficiency. Moreover, AA has higher gross profit than TA. TA’s gross profit reflects the low cost
strategy used with minimal mark-up on pricing. As for AA, although a low cost strategy is used, there is a
huge mark-up made on the inventory sold. This is due to AA's strategy in minimising the air fares by

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excluding the meals, however, should the passengers which to order meals, the price is marked up
significantly, thus the high profit.

Dupont (Profit)

In year 2012, AA performs better than TA as TA's Margin Ratio is negative. There is a significant
rise in the net income of AA due to the disposal of affiliate share (Thai Air Asia Co Ltd). Although the
2012 profit of Air Asia is a one-off benefit from disposal of affiliate shares, in 2011, its profit margin is
still more than TA. Based on the trend analysis, the profit margin of AA is going upwards, indicating a
better performance. Asset turnover of AA is also lower than TA, indicating good decisions have been
made by AA by investing in key assets which leads to the generation of sales revenue. A high Asset
Turnover in TA indicates underutilization of key assets. ROA of AA increased from 2010 to 2012
indicating good performance as more return is generated from the asset, above industry average of
between 8 to 10%. CEL Ratio of TA is higher than AA, indicating a higher amount of return had been
delivered to TA's shareholder from the return generated by the Asset, hence minimal reserves are left in
the company for future expansion. TA has a higher CSL than AA and has been increasing in trend,
indicating a high leverage used to acquire assets as a high CSL indicate low equity and high liability (debt)
is used to finance the assets. In contrast, AA's has a declining trend in CSL, indicating a lower debt. A
high adjusted financial leverage of TA for both 2012 and 2011 indicate a higher financial risk on the
company as more debt is being used to finance the asset. ROE of AA is high in 2012 compared to 2011
indicating a high profit generated from funds invested by shareholders. As for TA, there is a fall in profit
in 2012 of about $140,000 from 2011 which leads to a negative ROE. The fall in profit of TA is due to a
significant increase in cost of sale. Hence, it is certain that AA performs better than TA. However, it
might also be a strategy used by TA to avoid any competition arises by reflecting a low ROE.

Asset Management

As the overall Asset Turnover is low for AA, hence, it had optimized the usage of key assets invested in.
A high Receivable Turnover of TA leads to overall high Asset Turnover. AA has a low Receivables
Turnover, indicating there is a possibility of management recognizing sales earlier than receipt of
payment from clients for ticket purchase. As this is a service based business, there should be minimal
inventory. However, due to AA operating at a bigger capacity and more globalized as compared to TA,
more inventories can be sold to customers in the airplane which will require a buffer of stock, hence

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lower Inventory Turnover. In general, fixed asset and PPE turnover to sales is higher for TA, indicating a
more active strategy in depreciation or optimization of the fixed assets.

Cash Flow Analysis

Based on the cash flow analysis, TA is not doing well as its receipts for customers fell, but payments to
supplier increases, thus, it is paying more than it receives. AA’s cash outflow due to payment to
suppliers had also increased significantly from 2010 to 2012 due to purchase of more assets and
expansion. Operating Cash flow of AA is high but positive indicating stable cash revenue from operation.
In contrast, TA is having a negative operating cash flow with high payment to suppliers and employees.
This could be due to additional spending made on marketing, advertising and expansion of business for
TA but as at optimal level compared to AA which has already expanded nationwide in many of their
hubs / affiliates. AA is paying a relatively high income tax due to a higher corporate income generated.
AA had focus most of its investment in Non-current Assets, hence a higher PPE turnover to Sales. Due to
high amount of cash being used to invest in assets, AA suffers a negative cash flow on investing cash
flows. Lastly, AA also suffers a negative cash flow in financing activities in 2011 due to the maturity stage
of the business whereby AA needs to repay loans and debts. All in all, AA’s cash flow position is better as
it has a positive operating cash flow and net total cash flow as compared to a negative net cash flow of
TA.

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Prospective Analysis

Sales and Earnings Forecast & Reason for Major Assumptions

Based on the continuous geographical expansion plan of Air Asia (AA) in Asia in the past that lead to an
average growth of 12%, with another 200 aircraft to be delivered (PWC 2013) as shown below,

we expect AA to be able to continue to increase presence in more cities and increase in flight frequency
for higher demand routes. Their sales growth will still be strong and consistent at 10% from the
immediate years of 2013 to 2015. However, certain level of saturation will take place and we expect the
growth rate at 9% thereafter.

NOPAT has been strong from 8% in 2010 to 10% in 2011 and further increased to 17% (minus the extra
gain from sales of share in Thailand JV) in 2012, we believe AA has built further capability in operational
cost control and also given the growing size, is able to leverage on many shared services to cut cost
further. Therefore we expect the forward trend NOPAT to stay at 16% from 2013 to 2016 and make a
more conservative forecast to 15% from 2017 onwards to reflect higher rate of uncertainties in fuel cost
fluctuation going forward.

In the airline industry, working capital (WC) is huge as cost of aircraft and other equipment is high. We
expect the WC trend to have marginal gradual reduction from 24.8% to 23.3% over the next 10 years.
Similarly for Long Term Asset (aircraft and other equipment), we forecast a minimal gradual reduction
from 260% to 250% over the next 10 years.

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Given that the cost of debt is still relatively low compared to cost of equity, we expect the management
of AA to continue to leverage on loans to finance their forward investment plans, therefore keeping the
debt ratio constant at 45%.

With the consistent growth, the projected Sales by 2022 would touch RM12billion and Earnings at
RM1.2billion. Operational Return on Assets (ROA) would remain in the region of 5.5% and Return on
Equity at the rate of 6.5% to 7.1%. However, given the high debt ratio, any upwards movement of cost
of fund will have an impact on any airline like AA, but given AA size and bargaining power and higher
credit rating due to years of consistent performance, we expect AA to be able to secure lower than
market rate funding for their loans.

Valuation of the Company

Using DCF method, the valuation of AA Price is RM4.67 and using Abnormal Valuation, the AA Price is
RM3.73. However, if we use Dividend Growth Model, the AA Price is very low at RM0.17, this is due to
the low payout rate of only maximum of 20% of yearly earning. If we deploy PE and PB multiplier
valuation, AA Price is at RM 7.14 and RM3.35. Therefore it seems that the valuations based on potential
(DCF, PE) are higher than based on past history (PB). This is partly due to the rapid expansion rate of AA.

Valuations on Air Asia RM

Estimate using Discounted Cash Flow 4.67
Estimate using Abnormal earnings 3.73
Estimate using PE multiplier of 10.94 7.14
Estimate using PB multiplier of 2.05 3.35

We estimate the reasonable price to be between RM3.55 to RM4.65.

The price movement for AA has been moving in the range of RM1.36 in 2010 to RM3.90 in 2011 and
RM3.74 in 2012 and RM3.20 in 2013 which seems to be at the lower end Price of our valuation range.

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Recommendation

Despite all the challenges from other full service and low cost rivalry both in Malaysia and in the region,
Air Asia (AA) is still able to grow their passenger count year on year from 11.8mil in 2008 to 19.7mil in
2012. Threat from substitution mode of transport and new entrants like Firefly, Malindo Air did not have
a negative impact on AA as their load factor is 78 – 80% in the last 3 years and improving yield per seat
from 14.9 cents in 2008 to 17.4 cents in 2012.

AA is also able to use their fleet size and volume to negotiate much better deals to keep maintenance
cost, fuel cost, loan cost, aircraft net purchase price and other cost very low and is one of the best in
class in Asia (Poon et al 2010). This has resulted in consistent parallel growth in profit and cash flow.

Having an effective computerized pricing model allows AA to continue to adjust and optimize routing to
maximise profit in each of their operating country and region whilst tapping into bigger markets with
new JVs and new additional aircraft.

Given the good indicators on financial performance and financial health from the financial analysis, we
recommend a BUY as the price in 2013 did not breach RM3.20.

However, given the heavy dependence on future volatility of fuel and FOREX changes, the monitoring of
movements for these two components need to be done periodically and simple adjustments on
valuation price is needed to derive a more realistic fair value.

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References

Air Asia Bhd (Company No. 2844669-W) 2011, Annual Report 2011, Kuala Lumpur

Air Asia Bhd (Company No. 2844669-W) 2012, Annual Report 201, Kuala Lumpur

Department of Statistics Malaysia, 2010. Household Income, s.l.: s.n.

Investopedia US, A Division of ValueClick, Inc. 2013, available from

<http://www.investopedia.com/university/accounting/accounting6.asp>

Ali, S, Hampson, N, Inglis, W, Sargeant, A and Ali, A, 2013, ‘Aviation Finance, fastern your seat belts’,
PricewaterhouseCoopers LLP, available from pwc.com

Shuk-Ching Poon, T, & Waring, P 2010, 'The lowest of low-cost carriers: the case of AirAsia', International
Journal Of Human Resource Management, 21, 2, pp. 197-213, Business Source Complete, EBSCOhost,
viewed 29 June 2013

The World Bank/Data/By Country, available from <http:www./data.worldbank.org/>

Tiger Airways Holdings Limited 2011, Annual Report 2011, Singapore

Tiger Airways Holdings Limited 2012, Annual Report 2012, Singapore

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Appendices

Ratio Analysis

Components 2012 2011

Risk (Financial Ratios) AA Tiger AA Tiger
Current ratio 1.30 0.49 1.61 0.60
Quick ratio 1.18 0.48 1.47 0.57
Cash ratio 0.73 0.40 0.96 0.50
Operating cash flow ratio 0.52 -0.23 0.70 0.23
Liabilities to equity 1.84 3.31 2.45 4.14
Debt to equity 1.42 2.35 1.93 2.78
Net debt to equity 1.05 1.70 1.41 1.77
Debt to capital 0.59 0.70 0.66 0.74
Net debt to net capital 0.46 0.47 0.56 0.48
Interest coverage
(earnings based) 6.74 -9.53 2.82 13.71
Interest coverage (cash
flow based) 4.61 -9.84 4.75 17.53
Return (Margin Ratio)
EBIT margin 51.65% -17.83% 23.74% 12.89%
EBITDA margin 63.11% -11.57% 36.44% 15.46%
NOPAT margin 17.62% -19.85% 17.00% 8.50%
Profit (Dupont)
Profit margin (PM) 45.62% -19.18% 16.03% 9.12%
*Asset turnover (AT) 0.32 0.48 0.33 0.62
= Return on Assets
(ROA) 14.72% -9.25% 5.31% 5.68%
* Common earnings
leverage (CEL) 0.887523994 1.065382458 0.65 0.930921
* Capital structure
leverage (CSL) 3.08 4.68 3.54 4.61
=Adjusted financial
leverage 2.74 4.98 2.29 4.29
= Return on Equity
(ROE) 40.30% -46.11% 12.18% 24.39%
Asset Management
Total assets turnover 0.32 0.48 0.33 0.62
Cash turnover 2.28 2.81 2.49 2.46
Receivables turnover 4.01 15.99 4.61 18.42
Inventory turnover 227.64 3572.12 241.14 7327.94
Fixed assets turnover 0.50 0.64 0.50 0.93
Net long-term assets/sales 0.45 0.64 0.45 0.94
PPE turnover 0.50 0.64 0.50 0.93
Common Size Earnings
Cost of sales 50.06% 92.20% 50.50% 78.97%
SG&A 26.42% 39.15% 25.27% 31.57%
Other -28.14% -13.52% 0.50% -23.44%
Interest 7.66% 1.87% 8.41% 0.94%
Tax 3.50% 0.72% 4.93% 3.46%
Net income 40.49% -20.43% 10.40% 8.49%
Gross profit margin 49.9% 8% 49.5% 21%

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Cash flow statement Air Asia Tiger Airways
2012 2011 2012 2011
Classifications Notes $'000 $'000 $'000 $'000
Operating activities
Receipts from customers 3,048,478 1,891,320 56,625 75,916
Payments to suppliers and employees -1,455,942 -318,496 -106,965 -19,122
1,592,536 1,572,824 -50,340 56,794
Dividends received
Operating cash flows Interest received 79,391 43,422 760 627
Other revenue 72,693 177,741 -42,460 24,098
Interest paid -378,808 -367,707 0 0
Income tax paid -10,856 -22,381 -610 0
Net goods and services tax paid
Cash inflow (outflow) from operating activities 1,354,956 1,403,899 -92,650 81,519

Investing activities
Proceeds from sale of property, plant and
equipment 15,170 387,960 344,784 0
Investing cash flows
Payments for property, plant and equipment -1,950,701 -875,431 -467,880 -426,976
Payments for intangible assets -5,726 -567
Cash inflow (outflow) from investing activities -1,935,531 -487,471 -128,822 -427,543

Net debt (repayment) or issuance
Net stock (repurchase) or issuance
Net stock (repurchase) or issuance
Dividend (payments)
Net (decrease) increase in cash
Financing activities
Proceeds from borrowings 870,922 -244,076 206,782 474,919
Proceeds from sale of treasury stock -1,094 16,395 154,996 0
Share options exerised 1,967 5,021 329 1,636
Dividends paid -138,957 -76,965 -175,766 -141,552
Net cash provided by (used in) financing activities 732,838 -299,625 186,341 335,003
152,263 616,803 -35,131 -11,021

Page 19 of 24
 Value
Value of Total Value
Begunning Beyond
Forecast Value Per
Book Value Forecast
Period Equity share
Horizon
Equity value
Abnormal earnings 5,904,066 -592,716 5,062,042 10,373,393 3.73
Free cash flows to -
equity n/a 1,637,272 12,991,640 11,354,368 4.67

Page 20 of 24
 Air Asia Group
Forecasted Financial Statements

Prior yr 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Terminal yr
Sales growth rate % 12.0% 10.0% 10.0% 10.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%
NOPAT margin % 12.0% 16.0% 16.0% 16.0% 16.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%
WC to sales % 24.8% 24.8% 24.5% 24.5% 24.2% 24.2% 23.9% 23.9% 23.6% 23.6% 23.3% 23.3% 23.3%
LT assets to sales% 259.0% 260.0% 260.0% 255.0% 255.0% 255.0% 255.0% 250.0% 250.0% 250.0% 250.0% 250.0% 250.0%
Debt ratio % 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0%
After-tax cost of debt % 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
Dividend rate % 6.9% 8.0% 8.0% 8.0% 9.0% 9.0% 9.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

Income statement ($'000)

Sales 4,946,091 5,440,700 5,984,770 6,583,247 7,175,739 7,821,556 8,525,496 9,292,791 10,129,142 11,040,764 12,034,433 13,117,532 14,298,110
- Net operating profit after tax 870,512 957,563 1,053,320 1,148,118 1,173,233 1,278,824 1,393,919 1,519,371 1,656,115 1,805,165 1,967,630 2,144,717
- Net interest expense after tax 278,912 306,480 331,203 360,624 393,080 427,997 458,153 498,840 543,736 592,022 645,304 703,381
= Net income 591,600 651,083 722,116 787,494 780,153 850,827 935,765 1,020,531 1,112,379 1,213,143 1,322,326 1,441,335
- Preferred dividends 0 0 0 0 0 0 0 0 0 0 0 0
= Net income to common 491,700 591,600 651,083 722,116 787,494 780,153 850,827 935,765 1,020,531 1,112,379 1,213,143 1,322,326 1,441,335
Beginning balance sheet ($'000)
Beg. Net working capital 1,226,631 1,349,294 1,466,269 1,612,896 1,736,529 1,892,817 2,037,594 2,220,977 2,390,477 2,605,620 2,804,023 3,056,385 3,331,460
+ Beg. Net long-term assets 12,810,376 14,145,820 15,560,402 16,787,280 18,298,135 19,944,968 21,740,015 23,231,976 25,322,854 27,601,911 30,086,083 32,793,831 35,745,275
= Net operating assets 14,037,006 15,495,114 17,026,671 18,400,176 20,034,664 21,837,784 23,777,608 25,452,953 27,713,332 30,207,532 32,890,106 35,850,216 39,076,735
Net debt 6,972,801 7,662,002 8,280,079 9,015,599 9,827,003 10,699,924 11,453,829 12,470,999 13,593,389 14,800,548 16,132,597 17,584,531
+ Preference shares 0 0 0 0 0 0 0 0 0 0 0 0
Openning equity 5,902,099 8,522,313 9,364,669 10,120,097 11,019,065 12,010,781 13,077,684 13,999,124 15,242,332 16,614,142 18,089,558 19,717,619 21,492,204
Equity injections needed 0 0 0 0 0 0 0 0 0 0 0 0
= Net capital (beginning) 15,495,114 17,026,671 18,400,176 20,034,664 21,837,784 23,777,608 25,452,953 27,713,332 30,207,532 32,890,106 35,850,216 39,076,735
+ Profit 491,700 591,600 651,083 722,116 787,494 780,153 850,827 935,765 1,020,531 1,112,379 1,213,143 1,322,326 1,441,335
Less div. distributions -681,785 -749,174 -809,608 -991,716 -1,080,970 -1,176,992 -1,399,912 -1,524,233 -1,661,414 -1,808,956 -1,971,762 -2,149,220
Equity issues 1,967 932,541 853,518 986,460 1,195,937 1,367,720 1,247,604 1,707,355 1,875,512 2,024,451 2,223,873 2,424,022 -20,784,319
+ Closing equity 5,904,066 9,364,669 10,120,097 11,019,065 12,010,781 13,077,684 13,999,124 15,242,332 16,614,142 18,089,558 19,717,619 21,492,204 0
= Net capital (closing) 17,026,671 18,400,176 20,034,664 21,837,784 23,777,608 25,452,953 27,713,332 30,207,532 32,890,106 265,808 265,808 265,808
Ratios
Operating return on assets (%) 5.6% 5.6% 5.7% 5.7% 5.4% 5.4% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%
Return on equity (%) 10.0% 7.0% 7.1% 7.1% 6.5% 6.5% 6.7% 6.7% 6.7% 6.7% 6.7% 6.7%
Book value of assets growth (%) 10.4% 9.9% 8.1% 8.9% 9.0% 8.9% 7.0% 8.9% 9.0% 8.9% 9.0% 9.0%
Book value of equity growth (%) 58.6% 8.1% 8.9% 9.0% 8.9% 7.0% 8.9% 9.0% 8.9% 9.0% 9.0% -100.0%
Net operating asset turnover 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4
Cash flows ($'000)
Net income 591,600 651,083 722,116 787,494 780,153 850,827 935,765 1,020,531 1,112,379 1,213,143 1,322,326 1,441,335
- Change in net working capital -116,975 -146,627 -123,633 -156,288 -144,777 -183,383 -169,500 -215,143 -198,403 -252,362 -275,075 3,331,460
- Change in net long-term assets -1,414,582 -1,226,878 -1,510,855 -1,646,832 -1,795,047 -1,491,962 -2,090,878 -2,279,057 -2,484,172 -2,707,747 -2,951,445 35,745,275
+ Change in net debt 689,201 618,077 735,520 811,404 872,921 753,905 1,017,170 1,122,390 1,207,159 1,332,049 1,451,934 -17,584,531
= Free cash flow to equity -250,756 -104,344 -176,852 -204,222 -286,750 -70,612 -307,443 -351,279 -363,037 -414,917 -452,260 22,933,540

Net operating profit after tax 870,512 957,563 1,053,320 1,148,118 1,173,233 1,278,824 1,393,919 1,519,371 1,656,115 1,805,165 1,967,630 2,144,717
- Change in net working capital -116,975 -146,627 -123,633 -156,288 -144,777 -183,383 -169,500 -215,143 -198,403 -252,362 -275,075 3,331,460
- Change in net long-term assets -1,414,582 -1,226,878 -1,510,855 -1,646,832 -1,795,047 -1,491,962 -2,090,878 -2,279,057 -2,484,172 -2,707,747 -2,951,445 35,745,275
= Free cash flow to capital -661,045 -415,942 -581,169 -655,001 -766,591 -396,521 -866,460 -974,829 -1,026,460 -1,154,945 -1,258,890 41,221,452

Equity valuation
Abnomal earnings -47,573 -51,267 -36,891 -38,936 -120,655 -129,999 -114,169 -122,644 -133,682 -143,574 -156,495
Abnormal ROE (%) 2.5% -0.5% -0.4% -0.4% -1.0% -1.0% -0.8% -0.8% -0.8% -0.8% -0.8%
Free cash flows to equity -250,756 -104,344 -176,852 -204,222 -286,750 -70,612 -307,443 -351,279 -363,037 -414,917 -452,260
Asset valuation
Abnormal NOPAT -47,573 -51,267 -36,891 -38,936 -120,655 -129,999 -114,169 -122,644 -133,682 -143,574 -156,495
Abnormal operating ROA (%) -0.3% -0.3% -0.2% -0.2% -0.6% -0.5% -0.4% -0.4% -0.4% -0.4% -0.6%
Free cash flow to capital -661,045 -415,942 -581,169 -655,001 -766,591 -396,521 -866,460 -974,829 -1,026,460 -1,154,945 -1,258,890
Discount factors
Equity 0.93 0.87 0.80 0.75 0.70 0.65 0.60 0.56 0.52 0.49 0.45
Assets 0.96 0.92 0.89 0.85 0.82 0.79 0.76 0.73 0.70 0.68 0.65
Growth factors
Equity 1.00 1.08 1.18 1.28 1.40 1.49 1.63 1.77 1.93 2.11 2.30
Assets 1.00 1.10 1.19 1.29 1.41 1.53 1.64 1.79 1.95 2.12 2.31

Abnormal Earnings Valuation

Abnormal earnings -47,573 -51,267 -36,891 -38,936 -120,655 -129,999 -114,169 -122,644 -133,682 -143,574 -156,495
Discount factor 0.93 0.87 0.80 0.75 0.70 0.65 0.60 0.56 0.52 0.49
Present value of abnormal earnings -44,254 -44,363 -29,696 -29,155 -84,044 -84,234 -68,816 -68,767 -69,726 -69,661
Beginning book value 5,904,066
PV abnormal earnings 2013 to 2022 -592,716
PV abnormal earnings 2022 on 5,062,042
Total Value 10,373,393
Shares 2,779,908
Value per share 3.73

DCF Valuation
Net Income to Common 591,600 651,083 722,116 787,494 780,153 850,827 935,765 1,020,531 1,112,379 1,213,143 1,322,326
- Investment in Net Working Capital -116,975 -146,627 -123,633 -156,288 -144,777 -183,383 -169,500 -215,143 -198,403 -252,362 -275,075
- Investment in Net Long-Term Assets -1,414,582 -1,226,878 -1,510,855 -1,646,832 -1,795,047 -1,491,962 -2,090,878 -2,279,057 -2,484,172 -2,707,747 -2,951,445
+ Increase in debt obligations 689,201 618,077 735,520 811,404 872,921 753,905 1,017,170 1,122,390 1,207,159 1,332,049 1,451,934
+ Increase in preferred equity 0 0 0 0 0 0 0 0 0 0 0
= Free Cash Flow to Equity -250,756 -104,344 -176,852 -204,222 -286,750 -70,612 -307,443 -351,279 -363,037 -414,917 -452,260
* Discount factor - Common Equity (CAPM) 1 1 1 1 1 1 1 1 1 0
= Present value of Free Cash Flow to Equity -233,262 -90,293 -142,359 -152,921 -199,738 -45,754 -185,313 -196,963 -189,354 -201,315

PV of FCF to Equity 2013 to 2022 -1,637,272

PV of FCF to equity 2022 on 14,628,911
= Value of the Equity 12,991,640

Shares 2,779,908
Value per share 4.67

Page 21 of 24
Air Asia Group
Cost of capital (2012)
Interest expense after tax $1,285 After-tax cost of debt 4.00%
Net Debt (beg. 2012) $5,081,909 % net debt 45.01%
After-tax cost of debt 0.03% Cost of equity 7.50%
Treasury bond rate 3.50% % equity 54.99%
Beta 1.00 WACC 5.925%
Risk premium (conservative) 4.00%
Cost of equity 7.50%

Net debt $7,283,185

Equity market value (2012) $8,897,000
Total $16,180,185
% net debt 45%
% equity 55%

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 >2022
Capital structure
% net debt 0.45 0.45 0.45 0.45 0.45 0.45 0.45 0.45 0.45 0.45 0.4
% equity 0.55 0.55 0.55 0.55 0.55 0.55 0.55 0.55 0.55 0.55 0.6
Cost of capital
Debt % 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Equity % 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50%
WACC % 5.925% 5.925% 5.925% 5.925% 5.925% 5.925% 5.925% 5.925% 5.925% 5.925% 6.100%

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Air Asia Group
Statement of earnings (condensed)
2012 2011 2010
For year Ended 31 December $'000 $'000 $'000
Sales $4,946,091 $4,495,141 $3,948,095
Net operating profit after tax
Net income or profit for the yr $2,002,692 $467,381 $336,752
+ net interest expense after tax $1,285 $1,106 $1,180
= net operating profit after tax $2,003,977 $468,487 $337,932
- net interest expense after tax $1,285 $1,106 $1,180
Interest expense $378,808 $377,894 $384,340
-interest income $79,391 $66,078 $66,699
=net interest expense (income) $299,417 $311,816 $317,641
x (1-tax expense/pre-tax income) 92.05% 67.83% 89.99%
= net interest expense after tax $275,615 $211,497 $285,855
= net income or profit for the yr $2,002,692 $467,381 $336,752
- preferred stock dividends $0 $0 $0
=net income to common $2,002,692 $467,381 $336,752

Balance sheet (standardised)

2012 2011 2010
For year Ended 31 December $'000 $'000 $'000

Net working capital

accounts receivable $1,357,094 $1,109,775 $841,122
+inventory $23,725 $19,730 $17,553
+ other current assets $343,454 $303,893 $510,872
-accounts payable $1,295,065 $1,137,232 $912,943
- other current liabilities $628,362 $462,609 $376,681
= net working capital -$199,154 -$166,443 $79,923

+ Net long-term assets

+ Long-term tangible assets $11,111,360 $8,749,184 $9,318,070
+ Long-term intangible assets $7,334 $7,334 $8,738
+ Other long-term assets $1,307,979 $1,094,683 $320,068
- Minority interest $0 $0 $0
- Net deferred taxes payable -$361,396 -$516,100 -$719,260
-Other long-term liabilities (non-intrest-bearing) $510,208 $488,321 $452,865
= Net long-term assets $12,277,861 $9,878,980 $9,913,271
= Total assets $12,078,707 $9,712,537 $9,993,194

Net Debt
Short-term debt
+ Long-term debt $7,283,185 $7,186,919 $7,302,884
- Cash $2,232,731 $2,105,010 $1,504,617
= Net debt $5,050,454 $5,081,909 $5,798,267
+ Preference shares $0 $0 $0
+Shareholders' equity $5,902,099 $4,036,397 $3,640,960
= Total net capital $10,952,553 $9,118,306 $9,439,227

Page 23 of 24
PE & PB Ratio of selected airlines
Airline Company PE PB
Air Asia 4.90 1.96
Tiger Airways 0 2.37
Cebu Air 10.53 1.7
SouthWest 20.62 0.97
Ryanair 18.67 3.25
Average 10.94 2.05

Singapore Airlines 28.47 0.91

Malaysia Airlines 0 1.18
Thai Airways 4.49 0.63
Cathay Pacific 60.60 0.97
Average 23.39 0.92

RM
Estimated Air Asia Price based on PE of 10.94 = 7.14
Estimated Air Asia Price based on PB of 2.05 = 3.35

PE PB ROE Interpretation

- Expectations of high earnings growth relative to recent earnings (high P/E)

"Rising" H H H - Earnings growth will increase the asset base (high P/B)
- Both will contribute to rising ROE

- The firm will recover from recently lower earnings (high P/E)
"Recovering" H L L - Will not exhibit growth in asset base (low P/B)
- Will not exhibit high returns (low ROE)

- The firm will not grow earnings beyong current levels (low P/E)
"Falling" L H H - High earnings expected on current investments (high P/B & high ROE)
- New investment returns at lower levels (low ROE)

- The firm will experience earnings growth (high P/E)

Takeover or
L L L - Will not exhibit growth in asset base (low P/B)
"bankruptcy"
- Below average returns are expected (low ROE)

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