XAs an investment advisor with a major stockbroking company, you are now examining AirAsia stock and its valuation. You wondered whether to recommend the stock to one of your clients who did not currently have AirAsia in his portfolio. In determining whether AirAsia shares are fairly valued, you decided to focus on three valuation methods you had learnt, i.e. constant growth model, non-constant growth model and market multiple analysis.
Brief Background of AirAsia Bhd.
Based in Malaysia and founded by Tony Fernandes, AirAsia was named as the World’s Best Low-Cost Airline for five consecutive years (2009-2013). The company’s strategy is to provide low fares in line with its famous tagline of “Now Everyone Can Fly”. AirAsia presently operates with 150 aircrafts (Airbus A320) and has in the pipeline 200 new A320neo aircrafts with Airbus. The airline covers over 80 destinations via 160 routes crisscrossing 18 countries and has carried over 200 million guests since 2002. During the fiscal year ended December, 31, 2013, AirAsia’s net profits were RM362 million on the back of RM5.1 billion in revenue.
AirAsia became a publicly traded firm in 2004 with an initial stock price of RM1.25 and only paid its first cash dividend of RM0.03 in 2010 (why?). Analysts are generally upbeat with AirAsia’s future performance. As of June 2014, according to Thomson Reuters, AirAsia shares were ranked as “buys” in the coming months by 17 analysts, “holds” by 8 analysts and only one analyst recommended “sells”. Analysts’ consensus target price was RM2.80, relative to its closing price of RM2.33 on 16 June 2014. AirAsia’s 52-week high stock price was RM3.32 and the 52-week low was 2.18 per share.

Tasks
1. Calculate AirAsia’s required return using CAPM approach.

2. Determine AirAsia’s constant growth rate using historical growth rate and earnings retention model.

3. Calculate AirAsia’s intrinsic value using constant growth, non-constant growth and price/earnings multiple approaches.

4. What is your assessment of AirAsia’s stock price of RM2.33 as of 16 June 2014? Is the stock fairly, under or overvalued?

5. Based on your analysis in (4) above, what recommendation would you make to your client?

Assessment
You are required to produce a REPORT. You will not get good grades by merely presenting the numbers with little elaboration of methods and assumptions behind the answers.

Exhibit 1: FTSE Bursa Malaysia KLCI Index between 1993 and 2013

Year AirAsia EPS AirAsia Payout ratio KLCI Index

1993 736.51

1994 1032.39

1995 1064.59

1996 1125.48

1997 1077.4

1998 435.84

1999 791.91

2000 836.19

2001 589.42

2002 748.51

2003 683.27

2004 818.16

2005 0.09 0 898.04

2006 0.03 0 893.5

2007 0.14 0 1360.65

2008 0.33 0 1238.06

2009 0 0 1074.12

2010 0.21 0.07 1303.13

2011 0.36 0.19 1554.24

2012 0.21 0.09 1579.23

2013 0.64 0.31 1762.19
Assumption: long-term government bond rate = 3.0%