Short sellers put AirAsia in the crosshairs

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Budget carrier AirAsia has become the latest target of short sellers, with the shares in a tailspin despite analysts saying there's nothing new in a negative research report from GMT Research.

"People don't want uncertainty," said Mohshin Aziz, an analyst covering AirAsia at Maybank-KimEng.

"People get fearful and dump the stock," he added, noting that short-sellers' track record of successfully pushing down shares with negative reports may also be spurring selling.

The type of investors who like to buy into airline shares may also be a factor, Aziz said. "It has a habit of attracting eager beavers," Aziz said.

It is, after all, an old joke: How do you become a millionaire? You start with a billion dollars and invest in an airline.

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The stock has certainly reacted to GMT's report; shares were down as much as 12.8 percent in intra-day trade Wednesday, touching 1.43 ($0.38), their lowest level since 2011 and marking a nearly 35 percent drop month-to-date. GMT said in emailed comments that it believes the selling is by long-only investors, not short sellers, as the volume traded has been too large.

It's not entirely clear what's in the report from GMT, which calls itself an accounting research firm, not a short seller. GMT's website said its report questions AirAsia's "accounting, profit generation, cash flow issues, leverage and group structure," but it didn't release the report to non-subscribers, saying it has a press embargo until June 24.

Several other analysts' reports noted that GMT is setting a target price of around 1.20 ringgit for the shares; those reports cited GMT as questioning AirAsia's solvency, raising the possibility of a dilutive rights issue and concerns the carrier might have inflated aircraft lease income from associates.

For his part, Aziz said there are no new issues in the report .

"We and the analyst community have already deliberated it meticulously," he said in a note last week, adding that AirAsia's accounts were transparent and its auditing firm, PwC, respectable. Aziz rates the stock at buy, with 2.45 ringgit target.

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To be sure, one of the GMT accusations cited by analysts carries the weight of a legitimate concern, even if it's not new; the parent company is owed around 2.8 billion ringgit by its Indonesian and Philippine associates and some of these payments are overdue.

In the wake of the GMT report, AirAsia CEO Tony Fernandes issued a letter to investors dated Monday outlining strategies to reduce the carrier's gearing levels, including a move by the Indonesian and Philippine associates raising equity of around $100 million each from their local partners to pay the parent company -- a step Fernandes said was "in final discussions."

He also said he expected AirAsia's net gearing level to fall to around 2.0 times by the end of this year, from 2.47 times currently, which was already down from 4.2 times "a couple of years back."

Some analysts were skeptical of suggestions the loans to associates represented an existential threat.

"Even under the unlikely scenario of Indo AirAsia (IAA) and Phil AirAsia (PAA) going bankrupt and 100 percent of the receivables owed by related parties are written off, our analysis shows that AirAsia will remain in a very solvent position," Jian Bo Gan, an analyst at CLSA, said in a note earlier this week.

While he noted the risk those receivables might become impaired, he added that not only was the risk not new, the current low oil prices could "forgive" the associates' competitive issues, making a full write-off unlikely. He kept a buy call, with a 3.10 ringgit target.

The shares' sharp drop spurred the carrier to file a statement to the Malaysia stock exchange midday Wednesday.

"Management would like to assure the investment community that the company has a solid footing, strong balance sheet, rich in assets and good business outlook," the statement said, citing its ability to boost its first quarter earnings despite the fallout from the crash of flight QZ8501. AirAsia is taking "strong corrective action" at IAA, expects it to break even by the end of the year and meet its payments to the parent company, it said. It expects PAA to reach profitability in the fourth quarter. It plans initial public offerings of both associates in 2017.

Not all analysts, however, are shrugging off the carrier's potential negatives. AllianceDBS cut its target price to 1.80 ringgit from 2.30 ringgit.

"AirAsia's depreciation policies seem aggressive vis-à-vis its peers," Tan Kee Hoong, an analyst at AllianceDBS, said in a note Tuesday, citing higher figures for aircraft's useful life and residual value. "This distorts earnings quality, and could lead to future losses when the aircraft are eventually disposed."

Tan is also concerned that AirAsia, which this week was named the world's best budget airline by Skytrax for its seventh straight year, may be propping up the bottomline with unsustainable interest income from amounts due from its associates and joint ventures. But even then, Tan is sticking with a Hold call on the stock.

AirAsia is just the latest in a string of companies targeted by extremely negative independent research reports. Often, other analysts note that these reports contain no new information, but the stocks generally drop anyway.

Singapore-listed Noble Group's shares are down as much as 40 percent from their February peak before research firm Iceberg Research published a series of anonymously written reports attacking the company's accounting practices. In 2012, Carson Block – the short-seller who founded research firm Muddy Waters – issued an attack on Olam; its share price is still down around 17 percent from its levels before that report.

Note: This story has been updated to include comments from GMT attributing the selling to long-only investors.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1