Thursday, May 28, 2015

Has Airasia X actually improved?

The performance of Airasia X or even Airasia for that matter is very much dependent on the following factors:

  • fuel costs;
  • load factor i.e. what is the occupancy if I own a hotel; and 
  • average revenue per passenger.
It is a no-brainer for Airasia to be performing, ideally fuel costs has to be low, load factor high and of course average revenue per user should be high as well - the higher the better. This is not to say that other costs factor are not important but they are much more manageable. Typically, if one is to do a lot of promotion, average revenue would probably deteriorate while load factor would have improved, and vice versa. Hence, a good strategy would be finding a good balance - good load factor while not sacrificing on average revenue.

In accounting sense however, there is one factor that may also provide a huge variance - forex loss or gain. Just look at the forex loss or gain over the last 7 quarters. Why is the forex changes impacting it so much? Because a large costs including borrowing factor for Airasia X is in USD. In essence, the weaker its revenue based currency against USD, the worse off it would have been - i.e. Ringgit Malaysia against USD. This is basically what Airasia X was against in the past 2 quarters.

income statement for Airasia X over last 7 quarters
If I were to compare the performance over the last 7 quarters against its performance prior to IPO, I would say it has deteriorated after its IPO, but has actually improved in its recent quarters. It actually registered operating losses between 4Q13 to 3Q14 (over 4 quarters) which is a big NO. And for the last 2 quarters, that turned by it posting operating profit and that actually (I would say) improved in the most recent quarter despite the low load factor (74%) due to low advertising effort after the crash of one of its plane in Indonesia in December 2014. One should notice that the higher operating profit in 4Q14 was mainly due to much higher other income (mainly sale of aircraft and others).

Hence, in terms of operating performance, on the overall I would say Airasia X has improved despite some forex challenges that affects its financial performance. For Airasia X to be fully profitable for the year, I think it also depends on how it executes to improve its load factor while maintaining its average revenue per passenger as well as hoping that Malaysian Ringgit does not depreciate further. Lower fuel costs over the long term is also very important towards its performance.

It is however good to see that its performance in reality has actually improved as we do need a second local long and medium haul player despite the challenges.

Tuesday, May 26, 2015

What Keuro's 4Q15 results says

The latest quarterly results for Kumpulan Europlus was just announced yesterday and here are what can be deciphered.

- The West Coast project seems to be slow although it has started.
- lower contribution from Rimbayu for the month.
- adjustment for the fair value of holdings in Talam Transform is the major factor for its losses.

West Coast project

It seems that it has started to record in revenue and there are some progress in the project, albeit slow. By looking at the Other Intangible Asset (Concession Assets are intangibles under accounting standards), one can know that the amount has increased from RM139.7 million to RM158.5 million. Additionally, it has recorded construction revenue (Diagram 2) for the quarter of RM14.8 million. As one can see, previously construction revenue was rather non-existent. I am not sure whether project has been delayed or is it normal that it registers such low revenue, as it has just only begun.

Diagram 1: Assets representation for 4Q15

Diagram 2

Contribution from Rimbayu

Based on its Income Statement as below, I would think that RM3.12 million was part of the share of profit from the Rimbayu's project. The other sharing being in the forms of distributable income totalling RM2.92 million in Diagram 4. Few reasons, properties has slowed down and its progress billing was also slowed in the review period. Keuro has mentioned that the project for Phase 1 has been delivered but I doubt all have been delivered during the period. Would think that it would have spilled over to subsequent quarter.
Diagram 3

Diagram 4

Adjustment of fair value of Talam Transform

The main reason as mentioned for the losses was that provision for impairment on investment in associate. Keuro mainly only has Talam Transform as the significant associate. As depicted below, since it has already decided to sell those shares to Tan Sri Chan Ah Chye for RM99 million, I am just wondering why it devalue the investment held for sale as I highlighted in Diagram 1 above. On the books, those are now valued at RM78.5 million although would be sold at RM99 million. Is the sale not going to be completed?

All in all, I am not too happy with the disclosure by the management of Keuro on the progress.

Wednesday, May 20, 2015

What the latest Padini results (3Q15) says?

While Padini halted its continuous drop in earnings, registering RM26.6 million net profit for 3Q15 against RM21.1 million from its previous corresponding period, I do not take that as a major note. It is good to see that dividend is maintained and profitability are consistent though. But there are some new findings to note.

We know that Padini has more individual outlets and is less reliance on consignment sales. Collection  hence is not a problem. The sales are mainly cash sales. By having its own outlets and franchisees outlets, it is able to control where and how it does its sales promotions. The challenge here for Padini is to bring traffic or customers that buy. From its growth in sales through its performance review, that seems to be not much of a problem. Over the last few years, the profit margin it seems is the problem due to higher costs and price competition.

Does it need to throw huge discounts to attract customers, that's the question and more importantly, can it continue to sell with so much impending competition?

However - Immediate challenge for Padini is reducing its stocks as highlighted in its review for 2Q15 (previous quarter for ending 31 December 2014).

Performance review for 2Q2015 (ending 31 Dec 2014)
As mentioned above, reducing its stocks has been a priority due to the impending GST starting 1 April 2015. This is due to from the old stocks, it cannot claim input tax (as there was no input tax paid which can be claimed) - I presume. Only for purchases from 1 April 2015 onward would it be able to claim back input tax from its sales. This to me is a test, which means that the company has to make do with older stocks i.e. in clearing those while increasing sales and not suffering loss of margins. That was the task for the last few months prior to GST.

And I would say, it manages to show that it is able to do that. Just look at the drop in inventory and how it manages to increase its cash balances (highlighted below in red).

GST is a situation where it needs to test out its ability to execute and it delivers as I see it. Long story short, it is able to execute what it wanted to do - reduce stocks, increase sales and maintain margins while the purchases will come later.

Genting: How can one continues to pay himself higher when underperformed?

Genting Berhad's annual report for 2014 was out yesterday. Needless to say, unfortunately for the last few years I am not impressed at all.

To me it should not be a public company if it continues to pay the directors ridiculous amount of salary while it underperforms. If it is private, it can pay whatever amount they like. Just look at the 5-year performance below. It continued to grow its capital but it continued to amazingly underperform.

And it continues to pay the directors higher. Salaries and bonuses for executive directors grew from RM98.8 million to RM114.8 million despite the profit attributable to equity holders dropped from RM1.81 billion to RM1.5 billion. Remuneration for one person is RM151.6 million.

What did that person do? Reversed the fortunes of the group - towards substantially better to be able to be rewarded so much?

To top it off it is the non-executive directors, who signed off the accounts.

Saturday, May 9, 2015

My take on YFG's issuance of convertible debt

Here are my take on the redeemable convertible debt issued by YFG. One should read in detail the disclosure provided through Bursa. I should say this issuance is highly complex and one of the more complex notes (debts) that I have encountered. It is definitely issued and negotiated by people whom are experienced and knowledgeable on this topic.

As a start, let me go through the need for YFG to raise this. It definitely needs restructuring of its balance sheet as well as taking care of its growing debt. To go to the banks and get new loans, I think is almost very difficult given the scenario of its balance sheet. It will also face a lot of problem if it is going to the debt market - probably rated as junk.

But one of the reason which I took notice of this company is its ambition. YFG has faced countless challenges taking over a very difficult company. One does not discover just a single cockroach. If one cockroach is found, there are usually more.

With that I would say the RM100 million debt deal is a good option, although not fully ideal. This is because it can now fully concentrate on getting its business dealings moving forward rather than worry over the financing portion besides the very friendly interest rate of 2%. There is however no free lunch - do we think there really is one? Why?

The notes holder are given the option of converting the notes at a sweetheart deal i.e. 80% of the average closing price of the YFG share on any 3 consecutive market days during the 45 days prior to the conversion date - see below or a fixed option as below. (now you know why I said it is a mouthful to comprehend given the complexity and thoughts that are put into the deal). The conversion is however subject to approval from the company and/or shareholders depending on various situations.

Conversion terms of the notes
To control the conversion so that they are not at too low a price, there is a clause for redemption as below. Well you can do the calculation...

What other things to look at? Well, in the event the notes holders (and assuming that the notes are fully subscribed) are given the option to convert the shares and at 80% of its current market price, they would end up with a very significant stake of more than 70% in YFG.

My thoughts - the RM100 million approval needed for shareholders to make the decisions in a single general meeting is way too high as it does not need the amount now.  YFG also need to explain better why it needs shareholders to approve RM100 million. I would recommend to change it to approval for RM50 million with further option for  a further RM50 million in another session.

What are the risks and weaknesses in this deal to shareholders?

  • YFG could have raised additional funds but giving too much to the notes holders with an option of a cheap equity entry into the company;
  • 5% arranging fee is also quite high;
  • YFG is raising funds that it does not need and again giving away too much, hence too much dilution to YFG.
The benefits?

  • The 2% coupon rate is low and would not affect its financial cashflow as opposing to being financed through banks;
  • Deal would strengthen its balance sheet;
  • Funding is almost assured for the medium term.

Monday, May 4, 2015

On the low interest rates by Buffett (and gang)

What is said here is very true. With the low interest rates scenario, I am just wondering of where would people put their money. Bank's deposits is not a good option. People that have additional funds will have dilemma. This is also why we have seen generally prices of properties doubled (in many cases) over the last 5 years.

Anyone that says that the prices of equities are expensive due to past experiences may not look at today's perspective. Average interest rates 50 years ago may be much higher than the next 50 years. Japan had almost zero interest for the past 20 years. Janet Yellen has problem hiking up rates as other countries are asking her to delay the plan.

Another one below:

If Euro, Japan and China are going to continue to loosen their monetary policies (print more money), I am just wondering where do the additional liquidity goes to. People who have the ability to borrow are just borrowing to do what? Invest. Hence, there are probably more funds that goes into various assets - and those includes stocks.

5/5/15 - To prove a point, Australia's reserve bank just reduced interest rates to 2% - look at the rates during the 90s. Could anyone remember when we hear of even Malaysians putting money in AUD where they were getting more than 12%-13% interests?

My thoughts on Padini

I have been asked on Padini -
Why am I not doing anything about it, since the price has dropped substantially from the original purchase.

The performance of its stocks and financials have been deteriorating. Why?

Would the weakening of the ringgit be affecting its performance?

Why am I not selling then if I foresee the performance to be weakening in the immediate term.


These are my take.

Retail is definitely being hit especially for the non-essential goods. For Padini, it does come under a combination of both non-essential or to some extent essential. It all depends of the category of its customers. If the customers are working adult, they would definitely be needing new clothes and Padini targets the middle income. Currently, the low and middle income are the hardest hit in terms of inflation that has been affecting due mainly to GST. This will affect Padini and many other clothes retailers.

On top of the lower consumption power recently, I can see that Padini is also hit hard by higher rent and the lesser concentration of malls. If there are too many malls, it may not be a good thing for retailers as they are spread thin. This is possibly happened to Padini. It just expanded too aggressively and have their operations in too many malls. I rather they pick the higher traffic ones. My understanding is that this is due to the attractive part of starting early with a mall, where they get better deals especially store space and rentals.

Despite the lesser than stellar performance, I still think Padini will be a good stock to hold over the long term. Firstly, it is definitely not expensive today. It is a solid dividend stock. The strengthening of dollar is affecting all the other competitors and sooner or later, clothing retailers will increase their prices. They in fact are doing it already.

I still see the strategy and its space that Padini is in, there will be lots of expansion opportunity. It should start looking at expanding its franchise overseas and on the corporate front, perhaps should even consider buying back stocks rather than just dividends.