Thursday, December 1, 2016

DKSH should still be a strong company

I know I do owe some of you some of my opinion on DKSH. It has done well for the 2Q16 registering RM20.4 million net profit. However, that number has dwindled to RM5.4 million in its 3Q16, which can be shocking for some shareholders as we may not be used to such volatility for a company like DKSH. To be frank, there should not be much seasonality in this business, but I believe the quarter with Hari Raya could have impacted it as it is in the distribution business.

Other than that, there should not be much of a reason for its profits to be that way except that it took a much higher provision for impairment in receivables of RM9.72 million (see below). While it is not a good thing for the company, I guess it sometimes an unavoidable thing - being part of business.

The company took a RM9.72 million impairment charge for 3Q16
For those that are worried over this, I do not think this is a concern.

I actually have someone who asked me and being concern over its low cash in the balance sheet. Its cash as shown below was left at RM9.674 million. Again, I do not think that it is a cause for concern as DKSH certainly has short term working capital funding from banks. It may just happen that for its closing 3Q16, its cash position seemed to be on the low side.

Cash at RM9.7 million
Because of the nature of its business, do not expect DKSH to have very high profit margin - as it is more of a trading company. I would however be happy if it is able to manage that better. It did better in 2Q16 as compared to 3Q16.

For DKSH or many companies for that matter, we should not be too concerned over its quarter to quarter results but more of its medium to long term fundamental.

It does provide guidance and below is what it says. It does provide a decent to positive outlook of its future.

The reason I own DKSH is that it does have a certain moat as its actual competitors in terms of what it can do is not that many. It is a distributor, not a retailer. Retailers are getting challenges from e-commerce, but DKSH should be able to survive that as its business is more of a B2B rather than B2C.

Further, if one is to look at its reasoning for its growth, the second reason is a very strong reason - companies are more and more looking at doing ONLY what it does best. Which means especially the foreign importers, they will focus on using companies like DKSH to do the market expansion, distribution rather than doing it themselves. This is a global trend now and moving forward.

Tuesday, November 29, 2016

The true fact on Airasia's sale and leaseback

To those who have read my blogs, you would know that I have written about Airasia and some other airlines for many years. Throughout that, I have learned a lot through my own research as well as being part of the community that have been using the services provided by Airasia, MAS, Malindo, Firefly as well as several other airlines.

As an investor, I am always on the mission to know further what these companies are doing and I am not entirely and purely a numbers person (although my background is). I am fascinated with the business as much as the numbers. In my previous short article, I have highlighted that the Bloomberg's article is not quite correct. I respect Bloomberg as my source of business news and have pointed their articles to many of my friends but this time around it is with a wrong message.

Below is another after I said to myself, did I miss something. I looked through Airasia's AUDITED accounts since 2013 and try to search for any sense of sale and leaseback from the airline as I have said I have been following the airline and this also mean I read their annual reports year after year.

For FY2014, there was not even a mention of sale and leaseback. There are leases that Airasia embarked on being a lessor as well as lessee (if you are not sure what is lessor and lessee, check it out) but they did not do sale and leaseback.

Further for FY2015, as I checked further - this time around there are such arrangement - i.e. as in sale and leaseback. This shows that sale and leaseback has been a new thing since 2015 only, not prior. As shown below, where in 2015 there are sales of RM1.527 billion with gain of RM27 million. This shows that the gain that was registered is not as much as purported in the Bloomberg article.

2015 sale and leaseback as shown for FY2015 while there were no numbers for FY2014
Again disposals as shown for FY2015
What the above shows that Airasia was getting ready for an upgrade of planes with Airbus to deliver the new 320neo. Airasia, in my mind wanted better fuel efficient planes and 3rd quarter 2016 is the time which started to get these deliveries. Obviously, it cannot be operating with much lesser planes hence the sale and leaseback. I guess once it starts to get deliveries of the newer and one which has 186 seats, it will start to let go of the older planes. If you have noticed, Airasia over the last few years have had its maintenance costs increased and these shows that its fleet is getting older.

What some have been thinking that these older planes do not have value. They actually have, especially the narrow body planes as compared to a lesser sellable wide body planes.

Airasia has been having a depreciation policy of 12 years straight line for its plane assets and besides operating as an airline, it definitely knows what is best for its operations.

What Airasia has been doing in this case is not so much an accounting ploy but a business decision i.e. reducing its debt level, while preparing for purchases of newer planes. It is not buying new planes at low price (because of its bulk deal), sell them and lease them back. It is selling older planes, lease them back while waiting for newer planes.

I hope Bloomberg can get its facts correct.

Vivocom is potentially a Hoa...

I do not want to deliberate on a very good discovery on the early release of report by CIMB prior to the quarterly announcement by the company itself. How can it be?

This however also shows one should not trust a company as such and its perpetrator.

If one is to look at the company and at its free cashflow, one should wonder. They raised funds to cover the operating expenses. How is it valued at RM0.60, I wonder.

I cannot remember how many rounds of placements that it has made and the beauty of this company is that it is better at doing this kind of work than Asia Media. It still survives and can still have a valuation of 60+ sen by a respected IB. Just count, how many free warrants it has created.

I have written about Vivacom (formerly Instacom) and I think not much has changed, perhaps even more cruel and unsympathetic over people, but to enrich themselves.

Sunday, November 27, 2016

Airasia: Article on Bloomberg quite inaccurate

There was quite a bit of brouhaha on an article on Bloomberg which I think is largely to sell readerships.

One of the statement, which reads as below:

I do not think it works for Airasia like what is mentioned unless the Airasia group is not telling us the truth. See below:

From 3Q15 financial statement
The above basically shows that Airasia is doing its planning for the deliveries of newer A320neo aircrafts which has better mileage and caters for 186 seats for Airasia (an extra of 6 seats from its current fleet). 6 extra seats makes a significant difference. It does not seem to be doing a financial engineering as mentioned in the article on Bloomberg.

Further testament to that even if it is doing a sale and leaseback, the accounting treatment does not allow Airasia to be doing a financial engineering as mentioned. See below which is picked from its 2015 annual report.

Nowhere do I see Airasia locking in huge profits for its sale and leaseback in its accounts in the last few years. Yes, it does make profits from its leasing business but not to the tune as mentioned in the article.

I do agree that Airasia's financial performance for its airline business can be more volatile, which is why there are seemingly good interests for its leasing arm which has much less volatility.

What I think of the proposed sale of AAC
An aircraft leasing company seems to be able to garner a good 20-30x PE while as most people know Airasia is trading at mid single digit PE now. If the group is able to sell the leasing arm at a good price, it will see its balance sheet much improved while it can get ready for the deliveries of the A320neo which is much important for the next stages for the group as its fleet is getting old.

From my reading, not all the new planes that it purchases will be under the leasing arm (although new deals including the A321 does include AAC to have options for some of the new planes. This will make the sale of AAC much sweeter, in which case a DCF from the financial numbers of the company would probably be much better).

I also do not think the group would be so stupid to obtain all its planes under lease as a combination of owning and leasing are being done by airlines such as Southwest and Ryanair.

I think if it is able to get a good price for AAC, would be good to sell as it is now focusing on growing the brand rather than being also deemed to be a leasing company - which it should not be. Airasia is a low costs airline which it does best.