After being buffetted by persistent, record high oil prices, AirAsia priced its IPO towards the bottom end of the range on Friday. It marked a disappointing denouement for one of Asia's most interesting and entrepreneurial companies, but observers believe it was an achievement to price any kind of deal at all in a market currently obsessed with oil prices.
Under the lead management of Credit Suisse First Boston, ECM Libra and RHB Sakura, a 700.5 million share deal was priced at M$1.25 compared to an M$1.20 to M$1.50 range. Bankers say the M$858 million ($226 million) deal could have been comfortably priced at M$1.30, but the company decided to play it safe given Malaysia's extraordinarily long time frame between pricing and listing. The company will list on Bursa Malaysia on November 22, engendering considerable market risk for investors in the interim period.
Institutions are also said to have expressed concern about the 7% discount accorded to retail investors and the likelihood that some may take profits if the market remains flat ahead of listing. This has been somewhat mitigated by the fact that retail investors were only allocated 140 million shares, or 20% of the deal.
Institutions were allocated the remaining 80% of which 70% went to international investors. The international book is said to have closed four times covered and the overall institutional book three-and-half times covered. Retail was one-and-a-half times covered.
About 60 international investors were allocated shares and the top end of the book was heavily concentrated. In a bid to stabilize secondary market trading and reward those investors that committed in size, the top five accounts were allocated almost half of the entire book.
At M$1.25, AirAsia has been priced at 19 times 2005 earnings. Its major comparables have witnessed mixed performances over the past few weeks. Europe's Ryanair has traded flat around 15 times 2005 earnings, while Britain's Easyjet is up nearly 25% after Icelandair acquired an 8.4% stake, prompting take-over speculation. It is currently trading around 28 times 2005 earnings.
The main US benchmark, Southwest Airlines, has also performed well, rising nearly 15% over the past couple of weeks to trade around 23 times 2005 earnings. Analysts say Southwest has held up well because it has been able to lock in fuel prices at very low levels - $25 per barrel for 2005.
By contrast, AirAsia has admitted that it has broken the upper limit of its hedging contracts during the third quarter, though it has not said what the trigger price is. If the company stays within an pre-set upper and lower limit, it locks in its fuel costs at a set price no matter how fuel oil prices fluctuate. However, if prices rise above the upper limit, the hedging contract no longer applies although the company still receives fuel at a discount to spot prices.
Given that rocketing fuel prices may push jet fuel costs up to 43% of operating expenses next year, investors are said to have been very focused on the issue during roadshows. And even though start-up airlines typically trade a growth premium to more established competitors, most thought all the good news had already been priced into AirAsia's valuation.
For AirAsia's dynamic CEO Tony Fernandes, this was not the result he had been hoping for. Timing of the airline's IPO could hardly have been worse, with the company's trailblazing achievements in the budget airlines space lost amid a glut of headlines about oil.
Ahead of pre-marketing syndicate bankers still had high hopes of pricing towards the top end of the range and RHB Sakura is said to have agreed to hard underwrite its portion at this level. It was subsequently let off.
On listing, the company will have a freefloat of 30%, of which 25% constituted primary shares and 5% secondary.
