Thursday, March 31, 2016

What would Tune Air do?

In case you do not know, Airasia has just announced calling for a suspension. Suspension could mean big news (such as M&A) or and could sometimes mean a small insignificant news.

What do I think? I don't know. However, this is what I think it would be mostly needed. Privatisation. (Even though a day before today, it announced that the rumor that it is contemplating a deal with China's Everbright Bank is not true.)

Why do I think that it needs to do a privatisation. Any company that is doing major corporate exercise and needs time to do it, it is best to go the privatisation route. Dell, Maxis and even the latest MAS and Tiger Airways went for that.

Airasia is in that mould. I have said before, it needs to expand to compete. The airline industry cannot wait for Airasia to grow at its own pace. It needs to expand fast enough to compete. If Airasia cannot become the largest low costs airline in India, it needs to be second to Indigo - not fourth or fifth. Similarly, Japan, Indonesia or any new country it is planning to expand its base from.

The problem being a public company is that shareholders (most of them) do not understand. They want good dividends, they want strong growth in profits, strong balance sheets, less debt etc. For Nestle, Dutch Lady it is possible.

Unfortunately, Airasia cannot deliver all of the above. Airasia, needs to go leverage, it needs to raise funds and needs to expand further. Indian and Philippines operations need more money. India needs more than 5 planes. To do this, private equity is better than public equity - on paper and many times it is true.

Public just could not understand.

If however, it is to do a rights issue or private placements, I will be disappointed. Why? Just too low based on its current price.

Thursday, March 10, 2016

Why I think Keuro may rise 35% within the next 5 months?

For the project to go smoothly, Keuro will need to raise more equity for it to meet its debt-equity requirement as imposed by the banks or financiers. It will need more equity injection as it has already resolved its debt finances. The debt financiers over time require West Coast Expressway Sdn Bhd, an 80% subsidiary of Keuro to inject RM1.2 billion as equity capital. It has raised RM4.74 billion debt from the banks. The rest of the project money will come from the equity injection. (See below)

How does WCE funds its project total of RM5.94b

So far, Keuro has already injected around RM550 million into West Coast Expressway. It will need to find another RM400 million of capital to inject into the project to make up to RM960 million (20% or RM240 million will be from IJM's subsidiary, Road Builder which owns 20% of WCE).
Some portion of the money will be the from its sale of Talam Transform (RM80 million), the second may be from its warrants. Noticed that its warrant has a short term tenure of 2 years as compared to most warrants issued in Malaysia (typically 5 years).
However for people to exercise the warrants, Keuro's share price has to be above RM1.18 as its current price of RM0.90 does not attract anyone to exercise. One might just buy the parent share at around RM0.90.
As many would notice, Keuro's shares is quite tightly held. The top 30 holds around 80% of its stocks. The top 3 (IJM, MWE, Tan Sri Pang) holds more than 60%. IJM in fact is still slowly accumulating. (I do not think MWE or Tan Sri Pang will sell as their entry price is above RM1.20 unless they did a wrong analysis of their investments before this.) Besides the Top 3, there are several shareholders whom will not sell as they have been holding for many years - even before the highway was approved.  I am just thinking they are holding up and wait for the project to materialise and eventually complete.
As mentioned above, for it to raise the additional capital, it may need most of the warrants to be exercised i.e. at RM1.18. For that, shares of Keuro have to be at least priced around RM1.25 for it to be attractive. Why would anybody bother if it is priced at RM1.20. If it is significantly above the exercise price and the warrants are in the money, Keuro may be able to raise RM250 million for it to meet the equity portion. In fact, to have more certainty, it has to be above RM1.30. Exercising when the shares is at RM1.25 - RM1.30 is plain dangerous especially for a tightly held stock as the stock could easily drop to below RM1.18 within days. Maybe the minority shareholders will not take that risk.
Any other ways to raise capital? Sure - another rights issue but I do not think this is the best way. Through private placement? It is possible as well, but it will be priced above RM1 as the par value of Keuro is RM1.00. In any case, both rights and private placement has to be made at RM1.00 and above. Typically, for any rights to be attractive, the share has to be traded at significantly above the rights price.
Is there a third way to raise funds? - expect it to earn some from its current existing projects - WCE and Rimbayu, but I do not think it will reach the needed sum of RM300 million. If it does and does not need the warrant to be exercised or new issuance of rights, the share would be extremely attractive fundamentally. Imagine, it brings in free cashflow of more than RM250 million over next 3 years. That happens, the share itself is a winner. In any case, I do not think the group will take that chance i.e. dependent on profits. It only owns 40% of Rimbayu and 30% of the WCE construction portion.
From all of the above, the best situation for the company is for the warrants to be all exercised, if not all more than 80%.
And when is the warrant due to be expired? 26 August 2016 (5.5 months from now). There is no provision for the warrant expiry period to be extended.
Of course the major shareholders could do the unthinkable as they would still be exercising the warrants no matter what the parent price is, but wouldn't it be a sign that tells us the stock price at current value is very attractive for them to do this unthinkable? And as minority shareholder, it is a dream come true as major shareholders are buying shares at more expensive price (RM1.18) from what we can purchase at - RM0.90. That's amazing, wouldn't it?
IJM and the shareholders have come this far and will the project be jeopardized because of fund raising (of RM250 - RM300 million), I doubt it. If it supported Scomi by converting its convertibles, IJM will be more than wanting to make sure the WCE project goes well as its portion of the project is more than RM3 billion. 
Note: You will notice, seldom do I put a specific price point in a stock especially over short term (don't like that), but in this case it is more than just long term fundamentals for the stock but more of its short to medium term needs.

This was written in my Facebook before and obviously this is entirely my own opinion and I should not be blamed for any of your trading decisions. There could also be other ways where Keuro can raise funds or the banks may loosen the conditions for their capitalisation which I did not mention here. In one of the sessions (AGM or EGM, I cannot remember) though, there was question asked about its capital needs, I remember Keuro specifically mentioned of their need to increase the capital portion for WCE, and the management does not see any challenges in getting that done. Of course, they did not particularly explain how they were going to do those but the most common way for any to raise funds are as per mentioned above.

Thursday, March 3, 2016

What I think of the recent run in Airasia and AAX

Recently, both stocks have been largely traded so much so they have become speculative in nature. That's not good as I was hoping for much less speculation as it would probably allow these stocks to be traded closer to its actual value. Of course in terms of performance, in the eyes of most shareholders, Airasia had turned around while AAX for many quarters of losses (8, I believe), this is the first quarter which it has recorded a profit. As I have highlighted before, they in fact were already signs of improvements few quarters ago. You can read them here, here, here and here. But most people just looked at the last line i.e. PAT.

I have written a lot about both companies (Airasia especially), even promoting the stock as I have thought that there are never such opportunities that comes along that often. Usually when a stock has gone down significantly, they are either facing huge cashflow problems so much so one will need to understand in detail the works of the business or fundamentally have they really deteriorated (example some of the oil and gas services companies today)? In the case of Airasia, it is not so. Some harped on the huge debt in the balance sheet. Agreed, but what's clear is that the company is generating significant cashflow from operations (to more than cover those debts) and the stocks were traded at such a huge discount. So, am I buying cheap or am I buying great companies. Cheap - yes. Great companies - more like good company with room for improvement but in a competitive industry.

Both Airasia and AAX have still some areas to improve - such as make sure the balance sheet are stronger and for Airasia, making sure some of the operations such as Philippines and Indonesia to turnaround fast.

I am hoping and forecasting that these 2 stocks to perform even better in the next 2 quarters at least (due to the lower oil prices which are to be even better felt now - 2016), but one should look at the fundamentals in the long term. The fact of the matter is that to be great, Airasia (especially) needs to continue to invest. It is in a growth space in a seemingly mature industry. The mature players (SIA, Thai Airways, Qantas) are grappling with competitors whom have newer style of doing business and to a large extent, many governments or airports have changed to suit the market conditions. An example, Bangkok reinvested into the older airport (Don Muang) and turned it into a hub for low costs carriers. Malaysia has KLIA2. Singapore's Changi did something as well. Add on to that, the Malaysian government has implemented e-visa for Chinese nationals - all these are done for better travelling experience and they help Airasia and AAX.

Aren't those calls for continued reinvestments. If one does not invest and stay within their own countries only, they are calling for trouble. The fact is that Asia and larger extent ASEAN is so much interconnected that no low costs airline can just operate within its own country.

From this, I would expect Airasia to face turbulence still in its growth path but it is necessary. Every single investments into a new country will need many years to achieve first time profitability. And look at it, Airasia has still to see profits in Indonesia, Philippines, India, Japan and it is talking of going to Vietnam as well.

Yes, the recent drop in oil price and more mature and older traditional airlines coming to their senses that they cannot rely on their government to continue to rescue them allow Airasia to speed up the process of its continuous investments. This is a big plus in considering in the purchasing of this stock - not whether they can reach RM2.00 by next week.