Sunday, January 31, 2016

Tradeview - 2016 Value Pick No. 5 (Perusahaan Sadur Timah Malaysia (PERSTIMA) Berhad)

Dear fellow traders, 
I have shared 4 picks so far namely : 1.Magni  2.UPA  3.Apollo  4. FFHB
Once again, these writings are just my humble highlights (not recommendation), feel free to have some intellectual discourse on this. To join my telegram channel :
Value Pick No. 4: Perstima (Intial TP RM7.65)
With volatility in the market, I would suggest a more defensive pick and Perstima fits the bill. At current price, it is only trading at 10-11x trailing P/E while offering yields in excess of 6%. Given the above average dividend return, I think share price will be well supported. Further, Perstima has a strong balance sheet with a net cash position (RM0.96/share vs. current price of RM5.54). Considering this, the stock is priced at a mere 8-9x trailing P/E (ex-net cash).

What really excites me it is business prospects. Perstima has a monopolistic position in Malaysia with around 50-60% market share, granting it pricing power and the ability to maintain profit margins. For growth, it has exposure in Vietnam where the economy is still growing robustly. Further, Vietnamese Dong has strengthened against Ringgit over the past one year and this bodes well for Perstima. Another plus point is that its tinplates are used for the packaging of food, beverage and sanity cans, which are generally resilient in nature (non-discretionary consumer products).

Delving deeper into the financials, for the past 3 consecutive quarters, I observed that revenue and profit accelerated despite low tin prices. This was thanks to volume increase and forex tailwind. In turn, margins were lifted as well. I believe Perstima will continue to perform well in the upcoming quarters. To further back up my investment thesis, Perstima has raised its interim dividend to 18sen from 15sen recently, implying optimistic business prospects. 

At RM9.00 (60% upside), Perstima would reflect 16-17x trailing P/E and 14-15x on an ex-net cash P/E basis. On the other hand, dividend yield is still attractive at 4% at RM9.00 (assuming 38sen DPS - already paid out 18sen and typically the 2nd interim dividend is 20sen). I don’t think this back-of-the-envelope valuation is steep since this is a growth stock. Further, as EPS grow, the P/E would narrow while dividend payout would increase and hence, provide higher yields. FYI, Perstima’s payout ratio is between 60-70% (so much more room to dish out dividends) and yet the yield is superior compared to many listed companies on Bursa. However, as Perstima traditionally have been undervalued despite its monopolistic position, conservative individulas can provide a 15% discount for a conservative TP of RM 7.65.

To join my telegram channel :
Email me to sign up as private exclusive subscriber : 

Food for thought: Sacrifice is risking everything without guarantee. 
May good fortune come your way!
Disclaimer: This is not a recommendation to trade. It is merely the expression of the author's personal opinion and shall not be held responsbile for potential gains or losses executed by readers.

Legendary Investor Eric Sprott Shares the Greatest Financial Lesson He’s Ever Learned

In the wake of Japan announcing negative interest rates and chaos in the silver market with Thursday’s LBMA silver price fix smashed .84 below spot prices by the 6 fixing bullion banks, we welcomed The Admiral of the Silver Market, Eric Sprott himself to help us break down all the action. In Sprott’s words, the sheer brazenness of the silver fix smash “Reeks of Desperation“.
The discussion offers a unique look into the mind of the Billionaire Asset Manager, as Sprott shares insight into the thought process on how he evaluates whether a market is experiencing a bottom, and the legendary investor also shares the greatest financial lesson he’s ever learned…

  • Sprott Breaks Down London Fix Silver Manipulation: It Reeks of Desperation!  The sheer brazenness to think you can just put out whatever price you want…
  • How Does Sprott Evaluate if a Market Bottoming Process is Underway?
  • With the Value of the CAD Plunging, Have Canadians Started Turning to Gold & Silver For Wealth Preservation?
  • Sprott Warns on Systemic Collapse: We Were Right There in ’08, Here We Are 8 Years Later, & the Situation is Worse!
  • Sprott Reveals Gold and Silver Demand is WAY Off the Charts- Shortages Are Popping Up Again!
  • COMEX Down to 2 Tonnes of Gold- Will Eric Soon Be Able to Take the Last Physical Gold Bar out of the COMEX?
There’s an old saying on Wall Street.  The first five trading days of January often sets the tone for the rest of the year.  Think of it as trader folklore, and historically, there is some truth to the pattern.
Well, to heck with the first five trading days.  January’s stock market action has been downright ugly!  If it wasn’t for the Bank of Japan’s announcement of negative interest rates on Thursday and the Pavlovian ringing of the global liquidity bell, we wouldn’t have seen the S&P 500 gain 2.43 percent on Friday’s close.  That gain repaired some of the mauling sustained by the benchmark.  Nevertheless, carnage this January was exceeded only by the downside action of January, 2009.
I’ve warned many times this month on Weekly Metals & Markets as well as on Dr. Dave Janda’s show that we’re most likely going to see an ongoing bear market decline that takes time to unfold, not unlike the 2000 through 2002 and 2007 (in select assets) through the March, 2009 nadir.  Spike-down crashes are possible.  But an ongoing bear market, with plenty of “normal” bear market rallies is more common than spike down events like Oct., 1987.  In fact, don’t be surprised if we see the S&P 500 rise, on balance, during the month of February.  It’s ripe for a bounce, and with the Bank of Japan upping stimulus, the spice will flow;  more global liquidity is coming, and “Super Mario” already “surprised” the markets with a doubling down on his “whatever it takes” mantra.
Frankly, while I can’t prove this, I think it’s a reasonable speculation to assume that the Bank of Japan is playing its role, taking its turn drinking from the “currency war canteen,” as Jim Rickards likes to joke.  It’s reasonable to assume the BOJ’s action last night is fully coordinated with the ECB, the Fed and the Bank of England.  You can probably toss into the mix the Swiss National Bank and the Bank for International Settlements as well.
dollar index
The strong US dollar has been contributing to global deflationary forces upsetting financial markets.  The transmission mechanism takes many forms, including the impact to oil (and in turn, degrading balance sheets of energy companies), and to the dollar denominated debt burden faced by developing countries that piled on debt after the Fed led the world down the path towards our zero interest rate paradigm.  This debt doubles as collateral on the balance sheets of energy companies, and the treasuries/central banks of developing countries.  In a roundabout way, the rising dollar is sending earthquakes through the global shadow banking system and financial markets.
yen to dollar
euro to dollar
The dollar took a breather during early January.  But as you’d expect, the dollar leaped higher today in relation to the Japanese Yen.  Interestingly enough, the Euro also rose against the US Dollar – and has been rising over the last few trading days.  There’s every reason to expect the dollar to keep rising in the short-term, and this is going to probably put pressure on precious metals, quoted in US dollar terms.  But everywhere one looks, incoming economic data paints a picture of the US having already entered a recession.  Even official government stats paint this picture.  At some point, the “currency war canteen” is going to be passed to the US and the Fed is going to take a swig.  The reality of this transition will start to be priced into markets before Janet Yellen reaches for the liquidity canteen, and I expect this shift to start helping precious metals with a dollar tailwind starting within a couple of months.
But well before the dollar tailwind starts to help, we’ve got plenty of forces countering the dollar’s impact.  The laws of economics haven’t been repealed, and the supply/demand trends for physical metal Mr. Sprott discusses will pull the sector higher.  But don’t be surprised if we have another few months of cartel management and a generally stronger dollar before precious metals start to make a sustained move higher.

AirAsia to introduce Airbus A320neo this year

AirAsia Bhd will introduce four Airbus A320neo aircraft to its fleet in the second half of this year and 200 more by 2028.
The new A320neo aircraft are powered by CFM International’s new LEAP-X engines and will fly all routes operated by the budget airline.
Group Chief Pilot Technical and Efficiency Rajesh Gill said the A320neo aircraft will deliver fuel savings of up to 20 per cent and have the ability to carry two tonnes more in terms of payload for a given range.
“AirAsia placed orders for four A320neo aircraft earlier and the first delivery is slated for either June or July of this year,” he said, adding, the engines are still being certified at the moment by the manufacturer.
“The move to bring in the A320neo aircraft is in line with the company’s commitment towards climate change and taking proactive steps to reduce the carbon footprint,” he told reporters after the #GREEN24 community event here today.
Rajesh said AirAsia will be the first airline globally to use the Airbus A320 Sharklet equipped aircraft, which reduces carbon emissions caused by wing tip drag.
AirAsia Bhd Chief Executive Officer Aireen Omar said the A320neo is expected to replace some of the existing aircraft which are too old and consume more fuel.
“The new aircraft, to be delivered in stages until 2028, is more fuel-efficient and produces less carbon for the environment,” she added.
Meanwhile, the two-day #GREEN24 community event which began yesterday across the AirAsia Group and all its global offices, is aimed at saving energy, reduce wastage and encourage recycling.
Aireen said all across Malaysia, AirAsia offices are conducting activities such as beach, park and hill clean-ups, as well as recycling drives to further promote good environmental habits among staff and the public. – Bernama

Thai AirAsia increases flights

HAT YAI, 29 January 2016: Thai AirAsia will add a flight on its Hat Yai-Chiang Mai route to give passengers the option of two flights daily starting 1 April.
The additional flight aims to serve growing travel demand between north and south destinations in Thailand.
It is a response to customer demand that called for more direct flights between northern and southern destinations to avoid the inconvenience travelling via Bangkok.
Direct flight cut travelling and airport transfer time in Bangkok and significantly reduce the overall cost of air travel.
It also supports the government’s policy to encourage domestic travel across the country, between provinces, rather than focusing on just Bangkok residents’ travel needs.
Flight schedule Hat Yai (HDY) – Chiang Mai (CNX) inside-no-11
inside no 1*Starts 1 April
The airline offers a lowest one-way fare, inclusive of airport tax and fee, from Hat Yai to Chiang Mai at THB3,571. In comparison, Nok Air sells an inclusive one-way fare on the route at THB2,743.

CLSA fengshui chart 2016

CLSA fengshui chart 2016

Thursday, January 28, 2016

金價近3個月高!德國加緊搬回黃金 中國惦惦吃三碗公

自從布列敦森林體系(Bretton Woods system)建立了美元和黃金掛勾以及固定匯率制度後,德國自1950年代起開始儲備大量黃金、並將之存在海外金庫,而最重要的儲金地點便是聯準會(Fed)的紐約金庫。之後冷戰爆發、蘇聯佔據東德,為防蘇聯搶走金子,德國決定把更多黃金挪往西方。
除了德國加緊搬回黃金外,中國傳出也要在今年加碼買金。根據巴克萊(Barclays Plc)27日最新發布的研究報告,人行最近幾個月的買金活動相當穩定,今年每個月的購金量預估將達17.9公噸,一整年下來應會買進215公噸,目的是為了分散外匯存底(相關新聞見此)。

Wednesday, January 27, 2016

An Analysis on Favelle Favco

Author: JT Yeo   |   Publish date: Wed, 27 Jan 2016, 06:25 PM

Oil price began to fall from mid-2014 throughout 2015 and currently isn't showing any sign of recovering. Most O&G companies have been dragged down by this crisis and companies that directly or indirectly servicing the industry are not spared as well.
Favelle Favco's share price hit a peak of RM3.80 in May 2014 and subsequently dropping gradually throughout 2nd half 2014 and 2015 to RM2.40 last November before recovering slightly. Although results for the past few quarters have been holding up well partly thanks to MYR depreciation but clearly orders from the O&G and offshore sector is falling as most oil and resources sector companies decided to either cut back or delay capital expenditure in anticipation of ongoing low oil price scenario and potential slowdown at China as well. And the situation is made worse with many oil companies laden with huge debts during those aggressive expansion years at the peak of oil price.
However I believe that Favelle Favco has been a convenient victim of 'throw the baby out with the bath water' and it is not surprising at all with 70% of their orderbook coming from offshore sector. We will look at the impact of the oil crisis on the business, the crane industry and valuation of Favelle Favco.

Favelle Favco has a long history dating back to 1923 started by Edward Arthur Favelle and Harry Cole. Muhibbah Engineering acquired Favelle Favco in 1995 and Kroll Cranes in 1997. Kroll cranes was started in 1956 by F.B.Kroll in Denmark. They remain headquartered in Denmark to this day. Currently Mac Chung Hui is the CEO/MD of Favelle. He is the son of Mac Ngan Boon, co-founder and MD of Muhibbah Engineering.
Favelle and Kroll are both involved in crane manufacturing. Whereas Favelle focus on tower, offshore and power plant cranes, Kroll focus mostly on bridges and shipyard with both overlap in construction and power plant cranes. One thing in common is that both are focused on making large and heavy duty cranes. Their jobs mainly involve tendering, designing, manufacturing and delivering cranes.

The Industry
The crane industry derives most of their business from property developers, government projects, infrastructure & contractors. The industry is cyclical in nature as private and government sector tend to spend more during good years and cutback on bad days. In saying that, most crane manufacturers operate globally thus they are less susceptible to the economy of a particular country unless there is a global recession.
In crane manufacturing, most businesses are won through tender. Although in some cases buyers do directly approach a crane manufacturer for a customized crane or jointly research and produce crane model due to the requirement of a particular project they are undertaking.
There are many factors for construction companies to decide which crane is best suited for a construction project. These include the goal of the project, crane's reliability, cost, safety, regulations etc but mainly it is from the point of engineering and money.
For example, Manhattan is filled with skyscrapers on every corner. The streets that blanket the island are not as wide and it is hard to manoeuvre for large object. Therefore the size of a crane from delivery to site erection can be a main consideration when selecting a crane. Or take wind turbine and bridge construction. Some of these locations have extremely high wind condition. Thus the design of the crane to withstand these wind speed become a critical factor.
A crane can cost somewhere from 4 to 10 million each. But it is relatively small when compared to the cost of a construction project which typically cost few hundred millions. Take Burj Khalifa as an example, which is estimated to be $1.5 billion at cost. While a sizeable of that comes from meeting & planning, the remaining is material cost
What developers are more interested with is how fast and safely can a crane deliver the job. As with any construction project, speed is everything. Productivity is money. In Manhattan, the wages of a worker can cost $100 per hour when benefits are included. Cutting down construction time by a few months means millions in cost savings.
Another trend is that power plants (i.e nuclear or coal) & bridge developers are leaning towards the use of prefabricated elements as it offer several benefits in terms of construction time, safety, environmental and cost.
All of these factors contribute to the fact that mega structure builders are constantly searching for high capacity cranes that can deliver the job faster.

The Business
Enters Favelle. Favelle is well-known for its high speed high lift M-series diesel crane. They have also introduced MK-series electric cranes due to ongoing shift in client preference. But power wise, diesel crane is still the king.
Power is everything when it comes to building mega structure, be it towers or power plants. Powerful high speed crane can lift more, lift heavy and lift fast, which all results in cost savings. As one project manager explains:
"..It's because of the high speed. You're going up 1,000ft. You're pouring concrete, you can't go up slow or the concrete will set in the bucket. It's a labour intensive job, and time is money. It's all about line speed. The Favelle Favco can pick up a whole trailer load of steel with single part line..The concrete buckets are only 15,000lb, but the Favelle Favco 760 will pick up 55,000lb single line.."
Favelle derive around 70% of their business from offshore while the remaining comes from tower, power plants & construction. They provide other service such as rental cranes, winches & after-sales repair but main contributor comes from crane manufacturing.
Favelle started to venture heavily into offshore crane around 2000s partly under the influence of Muhibbah’s business in O&G, the increase in oil prices and proximity of O&G clients such as Keppel from Singapore, one of the recurring customer and the biggest oil rig builder.
While offshore crane is mainly focused on Asia countries like Malaysia, Singapore, Korea & China, tower crane business is more diverse geographically, serving whichever countries that wants to build the tallest buildings from One World Trade Centre in US, Taipei 101 in Taiwan, Burj Khalifa in UAE and now KL118, well in Malaysia.
Clients from power plants are pretty diverse as well but mostly came from developing countries such as Russia, China & India due to population growth putting pressure on demand for more energy.
Below we will analyse the some of the forces shaping the industry.

Competitive advantage
Barrier of entry
In crane manufacturing industry, the barrier to entry is considered medium. On one hand, expertise in engineering is all you need to build a crane. There are no advance technologies that can prevent companies from entering the industry. The true challenge for new entrants lies in their ability to establish reputation.
Cost of the crane is not a major buying decision for a construction company (which is a route entrant would normally take to enter a particular market by introducing a low cost option, such as the airline industry). They tend to go for crane companies with a reliable history because the risk of choosing an unproven manufacturer can be huge in many ways.
Crane down time can cost a lot of money from project delay to repairing. Safety & litigation can be a huge risk too if accident happens. And there’s the risk of after-sales service if new manufacturer decides to exit the industry after a few years. Most crane manufacturers also have patents for their own crane design thus it isn't as simple as stealing design.
So it is safe to say that new entrant would need a considerable sum of capital to establish their reputation and invest in R&D to enter the market. Therefore normally new entrant would rather acquire an existing company in the industry rather than starting from scratch.

Forces of supplier
The materials required to build a crane are mainly aluminium, copper, steels and electrical stuff. These materials are all commoditized so Favelle is not subjected to any supplier pricing control or dependent on any supplier in particular. Although margin can be affected by an increase on cost of material, generally they are able to pass it onto the buyers.

Forces of buyer
The majority of buyers are contractors on behalf of government and private builders. Since cost of a crane is not the major priority for these buyers but rather the capability of the crane of getting the job done, the forces from buyers are somewhat limited. And buyers do not buy in bulk either thus that reduce their bargaining power.
You see standardization generally leads to commoditization and commoditization leads to price competition that benefits the end users aka buyers. For a buyer when it comes to selecting a standardized product like airline seat, people rarely say 'I want to fly with Airasia'. They pick the cheapest seat available. Thus airline companies are intense competitors, which normally lead to price war at the benefit of buyers.
In the case of crane manufacturing, all crane models differ to a certain degree. They are not standardized products thus it is not easy for buyers to say 'I can get the same kind of crane for xxx price, can you match that price?".

Intensity of rivalry
One known fact from my research is that all competitors are bigger in size and more diversified compare to Favelle. Some of Favelle's competitors include Liebherr, Manitowoc and Zoomlion. And it is not unusual at all for developers to deploy several cranes from different manufacturers on a given project.
Examining the intensity of rivalry is particular hard as market shares for competitors are hard to obtain. But I am inclined to believe the competition is average to highly competitive but not to the point of killing each other. One of the reasons is that over the past decade or so Favelle has been able to maintain their ROIC at around 20% with profit margin increasing from 3% a decade ago to around 10-11% currently. And no doubt this is partly due to Favelle sticking to where they are good at rather than jumping into other crane market that they do not have an edge on.
And as mentioned above, competitors tend to compete on features and capabilities rather than price. Customized products do lessen competitions to a certain degree.

From the analysis above, I would classify it as a company with narrow moat. The supplier and buyer side of the industry does not seem to have a great power of stripping profitability away from Favelle. Barrier to entry, which dictates how fast will excess return revert back to cost of capital, is considered average to high because it isn’t easy for entrant to establish reputations in an industry that focus on safety, reliability & capabilities.
However in saying that, I do notice there is a trend where China crane manufacturers are slowly building up their reputations in the industry as the new entrant.
By now you will have an idea that crane manufacturers doesn't really compete on price or manufacturing capabilities. But rather it comes down to their engineering capabilities to design cranes that meet the demand of today's mega structure. Engineering, design & patent are their edge. And that comes from investing in research & development.

Now that we understand the industry and business, we shall connect the story to the figures. Most of the figures are self-explanatory. And it does show that the management has done a great job in turning the business around since acquiring it.

Some of the impressive numbers are profit margin growth and higher asset turnover, both leading to increase in ROE from low-mid teens to high teens. And this is done at the back of reducing debts by 50% over the period. ROIC growth is higher and gives a more accurate picture as ROE is diluted by the growing cash balance.
Another thing I must point out is how efficient the operation has become over the past 10 years by looking at the numbers. You can see net working capital (Current assets - current liabilities) went from 73 mil to 208 mil in 8 years which is fairly normal. The reasoning behind is as your business grows, you need to invest more in working capital i.e. inventory, receivables, payable etc. However at the same time cash balance went from 27 mil to 210 mil. If you only take into account 10% of the cash required for working capital, the net working capital has not grown much at all. Meaning less money tied up in working capital all the while revenue more than doubled.
Business model is considerable light in fixed assets as all they need is a big piece of land to build cranes and conduct research. Most assets are current with cash taking up 25% of that.
When you started to connect the story to the numbers in annual reports everything is easier to understand. Favelle do not need that many plant, property or equipments to build cranes. All the need is a big enough piece of land for inventory (which turnaround every 118 days), places to research cranes, and places to assemble cranes together before shipping to the site.
They sell are or less 100 cranes per year and cranes are made from very basic materials and electronics so you don't really need to invest a lot in expensive machineries. But rather majority of the assets are in receivables and inventory. Crane buyers don't care how beautiful your crane looks either, all they are after is performance. So all Favelle need is pushing the engineering boundaries, the rest keep it to a minimum.

Research & Development
Before my research into Favelle, my impression of the company is just as a manufacturing company, like “oh you want a crane, here I’ll make one for you”.
But now it becomes apparent that how well will Favelle do in the future comes down to their ability to innovate and continue to roll out new models that meets the demands of mega structure builders. And that mean’s investing in research & development.
Unfortunately, Malaysia companies are too shy to disclose this information. But from a reference I can take from Manitowoc’s annual report that they spend 1-2% of their revenue on R&D, as well as a RHB report dated back in 2013 mentioning Favelle spend around that percentage of revenue on R&D, it is safe to say based on current revenue they are spending around 8-16 mil a year on R&D.
Other than that, we won’t have a clue if their R&D is bearing any fruit. All we have is the track record. But uncertainty is part of analysis, and we will build that into our valuation.

Oil crisis
Personally I do not have any macroeconomic insight into where oil price will be for this year, next year or beyond. The only known fact is Favelle’s orders from offshore cranes will fall for sure.
The last incident when oil price suffered a huge drop is back in 2009-2010. Although it is brief compare to the current one. Favelle’s revenue suffered an 8% fall in 2009 follow by another 28% fall in 2010 while profit actually grow due to improvement in margins.
Few things you  need to take note is that back then the crisis does not originate from oil but from subprime therefore the drop in revenue comes from a mixture of slower construction throughout the world from tower to O&G. Currently the crisis comes from oil price itself. Whether we will go into another global recession is a different story.
Conclusion is we will prepare for the worst and we will build that into our valuation.

Generally it is best to create a few ‘most likely’ scenarios, assign probability to each of the scenario and estimate the value of the business.
In this case, we will create a bear case, a neutral and a bull case scenario.
Favelle’s 9 months free cash flow for 2015 is over 100 mil partly skewed by foreign exchange gain. Normally people would use the average FCF for past 3 years but I wanted to stress test Favelle, so I will go for 9 years average FCF. We will build in the margin of safety right from the start.

Bear case. In bear case we anticipate a total collapse on the offshore market. We will use 3 years average FCF of RM53 mil. Favelle’s offshore cranes contribute around 70% revenue so we expect FCF to fall to 16 mil a year (53 mil x 30%). No growth for next 10 years and no terminal growth either. We have an intrinsic value of RM1.87.

Neutral case. In neutral case I have decide to use 9 years average FCF rather than 3 years to 'stress test' the valuation. Also part of building margin of safety into the valuation from the start. 3 years average is 40 mil. We use a 5% growth on stage 1 (1st-5th year) and 3% growth on stage 2 (6th-10th year) and set terminal growth at zero. Value is RM3.57

Bull case. Lastly bull case. Using FCF of 53 mil. We assume 8% growth on stage 1, 5% stage 2 and 3% on terminal. Value is RM4.67

Lastly we assign all of them with expected probability. Don't ask me why 25% each on bull and bear. We have an expected value of RM3.37. That's about 15% above current price of RM2.85.

15% does not sounds much and especially people like me would demand a good 40-50% but as you can see we have err to the safe side from the beginning, insisting on margin of safety from free cash flow figures to growth in every scenario. Even our bull case growth assumption looks 'pessimistic'.
If you apply valuaton from multiples point of view, average 3 years EBIT is around RM90 mil, with current enterprise value of RM360 mil. We are paying 4x to own the company. Even if EBIT is to fall by 70% in worst case scenario to RM27 mil (assuming O&G sector disappear tomorrow,) EV/EBIT would still sits at 13x. And I think 13x is an okay multiple if not overly expensive.
I have applied various of other FCF and growth estimates which is too messy for me to put it here and the numbers keep falling down to the range of RM3.30 - RM4.60. And when I think it from the the point 'How much would I need to recreate Favelle Favco from scratch?", I tried to use their net asset as an anchor and do a layman asset replacement cost.
Favelle has a net asset of RM2.40, or RM526 mil. Some land or properties have not been revaluated for quite some time but those aren't that many. But one thing is clear is to buy all the lands and equipment on their assets at today's price would definitely cost more than RM526 mil.
And as I mention earlier in the post, it is a lot easier for new entrant to buy an existing crane manufacturer than building it from scratch and I think to buy the reputation, margin, ROE, everything sitting in balance sheet including the cash, it is not that demanding to pay RM700 to RM1 bil for Favelle. And that you have a range of RM3.20 - 4.56 again. With RM3.90 being the mid point.
RM3.30 ish seems to be sitting at the lower bound of my estimation. That is also why I believe the current price has already priced in the issue of oil price. And of course I also like to believe Favelle is a company worth keeping if they can continue to maintain their high ROE.

What we do know
Favelle has proven their capabilities by continue to roll out crane models that build some of the world’s tallest & iconic buildings over the past decade.
They have a solid balance sheet and based on track record, a well-regarded management.
Management has been successful in increasing ROE, profit margin, asset turnover & free cash flow

What we don’t know
How bad will the oil crisis affect the company is an unknown, thus we priced that into our valuation model
How well can Favelle continue to maintain their profitability (ROE above 20%) is uncertain, we can only look at back mirror and be conservative.      

AirAsia to gain from current lower jet fuel prices

Analysts at TA Securities Holdings Bhd (TA Research) upgraded its earnings projection for AirAsia Bhd (AirAsia) following a drop in jet fuel prices.
According to the Singapore Jet Fuel Swaps – a jet fuel price indicator – jet fuel prices closed at its lowest level since November 2003. Year to date, it has resumed the fall by another 24.8 per cent to US$33.1 per barrel on Jan 22, 2016 following a drop of 38.4 per cent in 2015, mirroring the downtrend in crude oil price.
Accordingly, TA Research upgraded its financial year 2016 (FY16) to FY18 earnings projections for AirAsia by 1.9 to 8.9 per cent after the change in assumptions for jet fuel price to average at US$50 per barrel for 2016 to 2018 as compared with our previous forecasts of US$65 per barrel for 2016 to 2018.
This also includes a 90 per cent of cost reductions from lower jet fuel price assumptions to be passed on to passengers through lower airfares.
“Although we are only one month into 2016, we reckon that our jet fuel price assumptions of average US$65/bbl for 2016 could be overly bullish, as Iran’s oil exports, after the economic sanctions were lifted, are expected to accelerate the glut in the market,” the firm said in a report yesterday.
“As such, we are revising our jet fuel price assumptions lower in the advent of revised budget 2016 announcement, which the government is expected to trim its expenditure based on a more realistic oil price assumption.”
Meanwhile, TA Research called on investors not to “read too much” into the AirAsia privatisation.
The news about privatising AirAsia first came to the market in October 2015 and recently repeated by AirAsia X, citing that taking the carriers – both AirAsia and AirAsia x – private is an option but both AirAsia and AirAsia X have not received any offers.
“Again, we do not spend much time to look into it as we believe taking AirAsia, one of the world’s best low-cost airlines, private is not an easy task without roping in strategic investors like the Employee Provident Fund, who has a strong financial muscle, to assume the mounting liabilities that AirAsia currently has.
“We upgrade AirAsia’s target price to RM1.72 and upgrade to buy from sell.”

AirAsia seeks to increase traffic by 3 mln passengers in Langkawi

LANGKAWI: AirAsia aims to fly an additional three million passengers to Langkawi over the next five years.
This is on top of the current 1.6 million passengers it ferried in 2015 and in the face of potential demand for traffic to the holiday island.
Group chief executive officer Tan Sri Tony Fernandes said to achieve the target, the airline is looking at more international routes from and to Langkawi, including Hong Kong, Jakarta and Shanghai.
AirAsia today welcomed its inaugural flight from Guangzhou to Langkawi at the Kompleks Lang Merah, Langkawi International Airport.
The budget airline had announced during the LIMA Airshow in March last year that Langkawi would be its latest international hub in Malaysia.
“Our plan is to base five planes here and over the next five years, I believe AirAsia can reach five million passengers.
“We will continue to add to the passengers to Langkawi and Kedah,” he told reporters after the welcoming ceremony.
Prime Minister Datuk Seri Najib Tun Razak, Kedah Menteri Besar Datuk Seri Mukhriz Mahathir and Transport Minister Datuk Seri Liow Tiong Lai were also present to welcome the inaugural flight.
It landed with a healthy 92 per cent flight load.
Among the guests on board were representatives from the Guangdong Tourism Authority and members of the media.
AirAsia currently holds a 60 per cent market share in Langkawi air traffic in operating direct flights to Kuala Lumpur, Penang and Singapore.
Fernandes cited the Guangzhou-Langkawi route as not only strengthening the airlines’ presence on the island, but also further boosting its economy with potential investments from China.
“By making Langkawi an international hub, we are confident we can boost the tourism traffic to the island.
“We have invested substantially to ensure this hub can accommodate and facilitate our projected traffic growth and achieve the goal of turning Langkawi into a regional Low Cost Carrier (LCC) hub,” he said.
Fernandez said AirAsia had received an average booking of above 80 per cent for the commencement of the inaugural flight from Guangzhou, which indicates a boom in tourism for Langkawi in respect of Chinese tourists.
To celebrate the momentous occasion, the airline is offering an all-in-fare from as low as RM199 one-way from Langkawi to Guangzhou and from Jan 25 until Feb 7, 2016 for the travel period of Jan 25 to May 2, 2016. – Bernama

Tony Fernandes to deal in AirAsia shares
KUALA LUMPUR (Jan 27): AirAsia Bhd ( Valuation: 0.60, Fundamental: 0.20)'s group chief executive officer Tan Sri Tony Fernandes intends to deal in the company’s shares during the closed period prior to the release of its results for the fourth quarter ended Dec 31, 2015.
In a filing with Bursa Malaysia, budget airline AirAsia said Fernandes, also AirAsia’s non-independent executive director, owned 530.14 million shares or 19.05% in the company.
AirAsia said the 19.05% stake comprised a 0.06% direct portion and an 18.99% indirect interest.
Fernandes' indirect 18.99% interest in AirAsia is held via Tune Air Sdn Bhd, according to AirAsia. His direct stake in AirAsia is held under CIMB Group Nominees (Tempatan) Sdn Bhd.
At 11:01am, AirAsia shares rose two sen or 1.5% to RM1.34, for a market capitalisation of RM3.73 billion.
The stock saw some four million shares transacted.
AirAsia's share price compares to the company's latest reported net assets per share at RM1.37.
(Note: The Edge Research's fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)

Thursday, January 21, 2016

George Soros 已扳动大贬世界各地经济的机关.

Soros: China Hard Landing Is Practically Unavoidable

Billionaire investor George Soros said China’s economy is headed for a hard landing, a slump that will worsen global deflationary pressures, drag down stocks and boost U.S. government bonds.
"A hard landing is practically unavoidable," he said in an interview with Bloomberg Television’s Francine Lacqua from the World Economic Forum in Davos on Thursday. "I’m not expecting it, I’m observing it.”
Soros, who built a $24 billion fortune through savvy wagers on markets, said he’s been betting against the Standard & Poor’s 500 Index, commodity-producing countries and Asian currencies, while buying Treasuries. China’s economic downturn will have spillover effects on the rest of the world, even though the nation’s policy makers have resources to manage the domestic fallout, he said.
The former hedge fund manager turned philanthropist joined a chorus of top investors -- including DoubleLine Capital’s Jeffrey Gundlach and Scott Minerd of Guggenheim Partners -- warning of further downside in riskier assets after a selloff that erased $16 trillion from global equities since June and sent commodities to the lowest levels in more than two decades. Concerns over China have roiled global markets this year amid waning investor confidence in the government’s ability to restructure the economy without a crisis.

Past Record

Hungarian-born Soros rose to fame as the manager who broke the Bank of England in 1992, netting $1 billion with a bet that the U.K. would be forced to devalue the pound. He also successfully bet that Germany’s mark would rise after the collapse of the Berlin Wall in 1989 and that Japanese stocks would start to fall in the same year. Soros, who began his career in New York City in the 1950s, led his hedge fund to average annual gains of about 20 percent from 1969 to 2011, when he returned money back to investors.
More recently, he has repeatedly warned of a 2008-like catastrophe. On a panel in Washington in September 2011, he said the Greece-born European debt crunch was “more serious than the crisis of 2008.” He reiterated that idea earlier this month, saying that global markets are facing a crisis reminiscent of the one more than seven years ago.

Deflation Risk

While Soros didn’t elaborate on his definition of a hard landing, he said a more accurate measure of China’s current economic growth is 3.5 percent, versus the latest official figures showing a 6.8 percent expansion in the fourth quarter. He added that the country’s unsustainable debt burden and capital flight are both signals of a hard landing. China had about $843 billion of capital outflows in the 11 months through November, according to a Bloomberg Intelligence estimate.
China’s slowdown is combining with lower oil prices and competitive currency devaluations to increase the risk of deflation around the world, Soros said. That will make 2016 a “difficult” year for markets because it’s a scenario investors aren’t used to, he said. Consumer prices in the U.S. declined 0.1 percent in December, while factory-gate prices in China have dropped for a record 46 consecutive months.
Soros said he would be surprised if the Federal Reserve raised interest rates again after increasing them in December for the first time in almost a decade, despite the central bank’s projection for further hikes this year. The Fed made a mistake in lifting rates when it did, he said, because deflationary expectations had already set in and consumers were less likely to respond to lower borrowing costs with increased spending.

Classic Bottom

Not everyone has such a bearish view. Investors are probably overstating the impact of China’s slowdown on the rest of the world and the economy is likely to avoid a hard landing this year, according to Goldman Sachs Private Wealth Management. Heather Arnold, who overseas about $42 billion as a money manager and director of research at Templeton Global Advisors Ltd., said in an interview in Tokyo this week that China shouldn’t be a big concern for global investors and she’s been boosting stock holdings.
“The depth of pessimism that’s out there seems unwarranted,” Arnold said.
U.S. stocks rebounded from the lowest levels in 21 months on Thursday, with the rally carrying through to Asian markets on Friday. The MSCI Asia Pacific Index climbed 2.4 percent at 10:32 a.m., while oil prices advanced and Malaysia’s ringgit led gains in emerging-market currencies. The Shanghai Composite Index increased 0.3 percent.
While asset prices may post a short-term rallies, Soros said, he hasn’t seen signs of a “classic bottom” in markets. It’s too early to buy, he said.
“This year is going to be a difficult year, and the balance is on the downside,” Soros said. “If you have a real bottom, it’s always retested.”

AirAsia X to reap benefits of lower fuel prices in 2016

By MIDF Research / The Edge Financial Daily   | January 21, 2016 : 10:29 AM MYT  
This article first appeared in The Edge Financial Daily, on January 21, 2016.

AirAsia X Bhd
(Jan 20, 19.5 sen)
Maintain buy with an unchanged target price of 26 sen:
The management’s optimism is not without basis. AirAsia X Bhd (AAX)  chief executive officer (CEO) Benyamin Ismail and team hosted sell-side analysts to a financial year 16 (FY16) outlook briefing at their office at the low-cost carrier terminal recently.

We were also fortunate enough to chance upon Datuk Kamarudin Meranun (group CEO), who explained to us that he and the board of directors feel that AAX would perform fairly better in 2016 with internal stress testing and number-crunching pointing to operating profit. Overall, I left the meeting feeling upbeat on AAX’s prospects.
We believe that fourth quarter ended Dec 31, 2015 (4Q15) results could be in the black at net operating income (NOI) level on the back of 1) higher yields (revenue per unit) due to more rational pricing; 2) improved load factors (utilisation rate) due to seasonality and lower industry capacity; and 3) lower average spot jet kerosene price, which according to our calculations, would average at US$56 (RM244.72) per barrel (bbl; down 39% year-on-year [y-o-y]).
While profitable at NOI level, the main deterrent to a positive profit after tax (PAT) remains its interest expenses, which would be higher due to the higher average US dollar/ringgit of +27% y-o-y. Nonetheless, we believe that AAX’s 4QFY15 results will likely break even at PAT level.
On the issue of potential threats by Malindo, which is expanding its network to medium- to long-haul destinations such as Australia and China, the management believes that AAX remains ahead of the competition.
AAX flies Airbus A330 wide-body aircraft against Malindo’s Boeing 737 narrow-body. The bigger aircraft offers advantages such as higher operating efficiency and comfort to passengers while pricing its fares lower. Moreover, Malindo could find itself in Malaysia Airlines Bhd’s cross hairs or vice versa as Malindo positions itself more as a full-service airline.
AAX will be able to reap the benefits of lower jet fuel prices in 2016 as it has currently hedged 50% of its 2016 requirements at US$60/bbl, which is -32% lower than its 2015 hedge at US$88/bbl.
Meanwhile, spot jet kerosene is trading at US$40/bbl, which is -38% lower than the 2015 average of US$65/bbl.
On a blended average basis, if jet kerosene prices were to remain at current levels for the remainder of the year, AAX would enjoy fuel cost savings of -35%, paying US$50/bbl compared with 2015’s US$77/bbl.
Meanwhile, we expect the weaker ringgit to be cushioned by natural hedges as 75% US dollar-denominated cost is hedged against 70% foreign-currency revenue (mainly US dollar and Australian dollar).
Our “buy” call is premised on AAX: 1) benefiting from lower fuel hedges in FY16; 2) improving yields and load factors from industry capacity cuts and less competitive pricing; and 3) compelling valuations, trading at only 7.7 times and four times FY16 and FY17 earnings per share respectively. — MIDF Research, Jan 20



衣食住行,相信很多人都为【住】这方面而感到头疼。因为屋价居高不下,年轻一代要自己购买一间属于自己的房子并不容易.2013年我就是因为买不起产业而跑去买产业股,当时笔者的心头好分别是MATRIX以及TAMBUN。而这两家产业过在当时也给了我非常丰厚的股息,平均大约5 - 6%之间。

不过好景不长,2014年下半年产业股开始走下坡,2015年更是进入寒冬期。以现在的局势来看,2016年的产业领域还是会非常萧条。几位做Property Agent的朋友也告诉我现在的行情很差,生意难做。从过去两个季度我们就可以看到产业股的业绩盈利大不如前,很多公司的盈利都一直在下滑。

这5家公司的平均PE才5.19, 最低的是KSL的3.82,而最高是MATRIX的6.43。
  • 为什么产业领域的PE可以这么低呢??原因是产业领域已经步入熊市,所以大家都对产业股比较悲观。当大家很看好一个领域的时候,通常这些公司的PE都会比较高。举个例子,现在Plastic以及木材股的PE都介于10 -20之间。
  • 由于股价走低,产业股的股息也变得非常诱人。这5家公司的平均周息率高达6.87%,有些甚至比产业信托还高。
  • 大家注意看的话,你们会发现HUAYANG, KSL以及SHL的NTA >股价。而且这些公司的Profit Margin介于20 - 34.3%, 在同行里都是佼佼者。
  • 产业股市有周期性的行业,这5家公司在2013年以及2014年的平均涨幅是63.52%以及27.57%。去年平均跌幅是9.14%以及今年的2.99%。
  • 有些读者问我产业股市否可以趁低买进,我的回答是,假设你是想拿股息。以上公司都是可以考虑的,假设是要资金增长,这是有点难度的。



sharing from :
1207.【贵或便宜】- RM5以上的贵股也有春天? 2015年10家平均上涨103.33%的【贵】股!!

假设你是个散户,你会买股价超过RM5的股票?相信大部分的人都会回答不会,笔者在1年前也会给出相同的答案。一直到去年的9月,笔者的几位前辈介绍了TOPGLOV这家手套股。当时TOPGLOV的股价已经RM7.50左右,我第一个反应是要不要哦??这么贵的股真的是买不下手哦!直到我花了时间做了功课,我才发现TOPGLOV真的非常吸引人! 那时候我就在RM8开始买进顶级手套,到现在股价已经是RM13.90了。所以说有【价值】的贵股也不一定会输给所谓的便宜股。

而笔者的师父也说,假设你买一家RM1的股票,你会多少股?基本上大家都会说1,000 units = RM1,000。假设你买超过RM10的股票,你也可以买100股也是相当于RM1,000。2015年虽然大势不稳定,但是有一些业绩优秀的贵股都交出了出色的迎接。今天笔者将会列出其中10家平均上涨103.33%的贵股。

  • 以上的10家公司在2015年封关介于RM5.64 - 13.90之间,涨幅的幅度是37.52% - 200.44%之间。2016年平均价格RM8.64。
  • 当中有5家是工业股,2家消费股,2家科技股以及1家贸服股。
  • 2015年涨幅超过100%的有TOPGLOV, LATITUD, KESM, MPI以及KOSSAN。
  • 而且很明显大部分的公司都是受益于美金走高以及油价下跌。2016年已经走了半个月,马币以及国际原油价格继续走低,这些公司在今年前半年内应该还会继续维持出色的业绩。
  • 此外,这些公司的ROE平均有16.61,除了KESM低于10,其他9家公司的ROE都介于12 -20.74。这是非常出色的数据,也证明管理层善于利用股东基金为公司创造盈利。
  • 此外,马来西亚股市股价超过RM10的公司不超过30家,而SCIENTX以及MPI就在今年挤进了股价RM10的榜单。

  • 笔者也一直相信公司的股价的涨幅离不开盈利,只要盈利进步,公司的股价自然而然会上涨。
  • 上图是10家【贵】股过去4年的EPS表现,我们可以看到这些公司的盈利大部分都是一年一年优秀的。
  • 只要以上公司可以仅需维持这种盈利上升的势头,就算股价再高,懂得他们内在美(价值)的投资者还是会买进这些公司的。 


Dear Concerned Investor:

"Sell everything" is the startling new advice from The Royal Bank of Scotland - warning its clients to brace for a "cataclysmic year."
No one can blame you if you're one of the many investors who is worried right now...
Not when CNN is proclaiming that this "global market freakout" is spreading...Canada's officially in a bear market (stocks down more than 20%)...things have gotten so bad in China that officials keep shutting down the market to keep it from falling any further.

And now this "freakout" is hitting close to home - the U.S. markets are off to the worst four day start to a year...ever.

Yes, danger is lurking out there, but brave investors have built enormous fortunes during the worst markets. J Paul Getty became the richest man in the world by buying oil stocks during the Great Depression...and John Paulson reportedly made a mind-boggling $3.7 billion during the largest stock-market crash this century.

And now this crashing market is offering brave investors like you another potentially historic buying opportunity.
The way to profit is surprisingly simple...

How to Thrive in Crashing Markets
Warren Buffett is the world's most successful investor, and his most famous motto is perfect for making money AT TIMES JUST LIKE NOW.

Buffett's genius solution is as simple as it is effective:
"Be Fearful When Others Are Greedy and Greedy When Others Are Fearful"

Well, let me ask you...
What are you hearing when you turn on the tv?
What are you reading in the newspaper? What are your friends telling you?
Does it seem like people are afraid?

Because if others are afraid, I think it's time to start being greedy - by using an investing system that proved itself during the biggest stock market crash of this century.
This system's performance was so remarkable that the Wall Street Journal reported that the newsletter was ranked #1 in the world for a five-year period that included the worst stock-market crash since the Great Depression.*

Today is your chance to take advantage of the amazing opportunities this system has uncovered.

Profiting during a market crash can often require two things:
    The courage to be greedy when others are fearful
    A system with a long track record of not just surviving, but thriving through market cycles.

I can't give you the courage to act - that's up to you - but if you decide that you are the kind of person who can take advantage of these potentially amazing buying opportunities...
I can give you inside access to the recommendations provided by this system - a system which has shown a remarkable ability to succeed through even the worst markets.

Remember, history teaches us that the terrified investors running for the exits will eventually come to their senses - once that happens this amazing opportunity could be gone

Good Buying Opportunity - Koon Yew Yin

If you watch CNBC you will see Cramer shouting the market down. He is like a preacher telling you that it is a sin to hold shares.
Cramer: Charts show huge sell-off could be coming

Since investors always follow the US Market, all the major stock markets in the world are falling. Most investors and fund managers are rushing to sell all their holdings as if tomorrow is too late to sell. All Fund managers will follow one another like in a herd of sheep. No one dares to take a contrarian view as there is safety in numbers.
If all investors can control their emotion of fear and think logically, all the shares will be fully valued and then there will not be any undervalue shares for you to buy. Now you can buy many good stocks at a discount. I think the following shares are good stocks to buy.
If you want to be a super investor, you must take advantage of this buying opportunity.
  Favco Canone Chinwell Focus Lumber VS Thong Guan
3rd last Q 10.34c   9.88c 3.94c 3.22c 2.58c 4.4c
2nd last Q   7.61c 14.77c 4.41c 7.80c 4.79c 6.75c
Last Quarter 14.27c 14.28c 6.07c 9.35c 5.22c 10.7c
Next Q ?? ?? ?? ?? ?? ??
Current Price 2.75 4.06 1.82 2.40 1.31 2.90

This company has strong capabilities of producing cranes that served 11 of the world 13 tallest buildings including Burj Dubai, Taipei 101 and Petronas Twin Towers. Their specialty is construction of “high speed high lift” tower cranes that move heavy things up and down fast. It also has strong branding and collaboration with partner like Caterpillar (the world’s biggest construction machine manufacturer) for its crawler crane. Last but not least, it is a cash rich company with a net cash position of RM1.15 per share. Some might argue that they involve in oil and gas sector which is very much depressed now. One who invests in this company is for its capabilities, know-how and strong balance sheet. It is a wiser bet to invest in Favco compared to other oil and gas companies as they will be in huge trouble if low oil price prolonged due to huge debt.
Canone involves in cans manufacturing business and production of sweetened condensed milk and evaporated milk. Commodity price like milk has come down substantially which benefiting F&B players like Canone. This is evidenced from Nestle, F&N, Dutch Lady and Canone’s latest quarter result showing reduced cost in and hence higher profit. As at today, milk price is still very much depressed. Canone also owns 32.9% of Kian Joo Can Factory Berhad. At its market price today, the stake is worth RM463mil which is half of Canone’s market cap.
This company manufactures and trades fastening and wire products. Together with the sister companies Gem Year Industry Co. Ltd in China and Jinn Her Enterprise in Taiwan (each managing by a brother), they are one of the biggest group of fastener manufacturers in the world, if not the biggest.
Chin Well is the beneficiary of implementation of GST as GST charging 6% while previously sales tax charging 10%. There were a lot cheap products from China selling without invoice to avoid sales tax. With the implementation of GST, they need to issue invoice which will push the prices up by 6%. European Union imposed anti-dumping duty as high as 74% tariff on imports of certain steel fastener from China and Malaysia. There are 9 companies being exempted from this rule and Chin Well is one of them. This anti-dumping duty has been extended for a further 5 years from 2015.
In February 2015, Chin Well acquired the remaining 40% shares in its Vietnam subsidiary and now they are able to fully consolidate the contribution from Vietnam. Vietnam has slowly becoming the preferred manufacturing hub due to its lower labour cost compared to China. Chin Well’s Vietnam operation is focusing on European’s DIY market which command higher margin. Chin Well exports 67% of its product hence they benefit from weak ringgit.
Focus Lumber manufactures plywood and veneers. It exports 97% of its products and mainly to USA.  It is a zero debt company with huge cash pile of 83 cents per share. Its profitability has improved for the past few quarters due to the fact that Ringgit has weakened significantly over the past few quarters. As low crude oil price leads to low gas price in US, people in US has more disposable income which leads to higher spending. Furniture players will benefit from this.
VS ranked 25 of the world top 50 electronic manufacturing companies in 2014. It is contract manufacturer of Keurig Green Mountain for its Keurig coffee machine, Dyson, sole OEM for Zodiac Pool Cleaners and etc. VS has operation in Malaysia, Indonesia, China, Vietnam and etc. 90% of the sales are transacted in USD and this accelerated earnings growth for the past few quarters.
The company was in talks with new clients in US and Europe and expect increasing export orders in 2016.
Thong Guan manufactures plastic and paper products like stretch films, garbage bags, flexible packaging and etc. It is one of the biggest players in Japan’s garbage bag market by having 15% market share. Thong Guan has been expanding all its production lines for the past 1 year and new capacity has brought in higher revenue and profit which evidenced in the past few quarters. There will be further new capacity coming in 2016 hence we can expect better performance for 2016.

Wednesday, January 20, 2016

Airasia-felicity sharing

I like felicity articles, they are good
I have some comments from a reader which I will try to answer:

felicity, I benefited from reading your blog articles, so here's my take on AirAsia.

1. Look at their free cash flow
Taking a long-term perspective, return to shareholders is simply discounted sum of free cash flow. Profit is an opinion, cash is real.

I have been a proponent of free cashflow in my blog and did I change my strategy and investment methods. No. It is accurate that Airasia has not been strong in its cashflow department over the last few years but if one is to read further, Airasia has been on growth path before and they have actually slowed down their growth since 2015. For 2015, one will see a net free cashflow of more than RM1 billion and that is before they have started to fully enjoy the much lower fuel price. Most airlines (except for many American airlines) had yet to enjoy the lower fuel costs. 2016 will be year where the lower fuel will start to provide the additional profits. Airasia's business generates real cash.

2. AirAsia has over $11B ringgit in debt. 
Sure, they have plenty of planes. But planes can't be sold otherwise, they would have to close shop. Even if they reduce their planes, they probably won't get a good price (see point 3).

Debt is definitely high. They have to work on it before it becomes overly burdensome. However, they are not in the business of selling planes but seats. Most tend to think what if it closes down. It is a business. They do sell old planes and buy new ones. On that part the narrow body planes are much better situation than wide body planes. Example A380 or B777 will have problem to be sold, not so A320.

3. There is a overcapacity in the airlines industry currently (as MAS's new CEO pointed out during a recent interview).

Wonder why you think AirAsia should be worth US$10B someday? Did you do a discounted free cash flow analysis or just compared them to valuations of other budget carriers?

I am the bullish one of course and most analysts provide a higher valuation than its current price. I myself think it should be higher, but of course its my opinion. Analysts tend to take the safe way out as by putting a much higher price, they are taking risk of being considered irrational. I can be irrational. If I think Airasia is worth $2 billion then for it to reach $10 billion is a multiple of 5x. I also do not think dollar will be 4.3x RM in the long run, hence valuation of say RM35billion does not sound too expensive anymore. But of course, many would think I am crazy as Airasia is only priced at RM3.7 billion today. That's 10-20 years down the road. If one is to look at the trajectory of successful and top low costs carrier, Ryanair, Easyjet and Southwest, they have that kind of trajectory over 15 years especially during growth to maturity period.

Today LCC are competitive (even have RayaniAir - hmmm sounds like RyanAir isn't it) but small ones will fizzle out. I am always the proponent of full fledged low costs - not the Singapore model such as Tiger and Scoot where they are owned by SIA. It is hard to have 2 models unless they are independent. I also like the management of Airasia (many will not agree with me) as they are positioned to be successful and grow. Some of the LCCs are positioned to be "jaguh kampung". Airasia is not although they do face huge challenges as we see it when moving overseas. Thailand though is one success story.

I however think SIA's subsidiaries like Tiger will give Airasia a run for their money overtime as SIA is a bigger parent than Airasia has. (Singapore by the country is also more focus, unlike Malaysia whom is trying to kill Airasia and in the process, affecting its own tourism business. I hope overtime they will realise that a strong LCC would bring benefit to the country especially when forex is important to Malaysia) 

Also note that as it is Tiger being valued more than SGD1 billion is a sign than a struggling low costs such as Tiger is worth something and not as per what Airasia is valued at today. Check news on SIA's offer for Tiger!

On having a DCF, it is preposterous as DCF model can be out of whack easily. Nobody can predict the cashflow future correctly. These are meant for financial people whom only uses excel well.

On overcapacity, its real and the one who blink first is MAS, right? Them cutting capacity brought some benefits to Airasia and other airlines like Emirates. The data is already been provided by Malaysia Airport whom reports on traffic monthly. The traffic since MAS had its cut brought traffic to KLIA2 significantly. Airasia is by far the biggest user of KLIA2.

In the long run, both LCC and full fledged will see competitions but the next decade will be decade for LCC than the one MAS, Emirates are focusing on. SIA (and I trust the data crunching from Singapore) has already foreseen that. I am seeing also that Airasia is in right position and will be there to ride the wave, But it has to be diligent and careful.
When I bought this low costs airline at RM1.12, many thought I was crazy. It is  a difficult sector - I agree. Warren Buffett said no, where many American airline companies went bankrupt before. Many Asian airlines went bankrupt as well and needed rescue by their government. Among them Japan Airlines, Thai Airways, Qantas (in trouble) and of course every now and then MAS had that problem and it may not just end.

Why? Because these are national airline companies and (as I have mentioned before), no country would allow their national airlines to be taken off the sky. That was how it was deemed before. Today, many countries still support their national airline, but that thought of supporting the national airline company - at all costs - is being less considered or shall I say is less important.

I would consider having an airline company to a country as like a country having a football team. No country that is able, would not NOT have a national football team - and believe me except for several very strong national teams, for most countries, these are a costly affair. One cannot however say due to this, we should not have a national football team. This is also why the current suspended FIFA president, Sepp Blatter has been in power for 5 terms. He knows what a poor country needs and through FIFA's financial strength, he supports them albeit the many corruption scandals as well.

Back to airline
So when all these countries fight, in a competitive world, most cases there is 1, 2 or at best 3 winners while all the rests would lose - badly. Until 10 years ago, in this region these winners were SIA, to some extent Cathay. The rest were losers that went bankrupt and relived through government rescue. Then came airlines from oil rich countries whom have nothing else to do but to continue throwing oil revenues into their own airlines. These countries supported Emirates, Qatar, Etihad and had seemingly unlimited cash so much so it seems that they are the one until today whom are supporting the Airbus 380 initiative. Without them and originally SIA, A380 would never had gone off the tarmac.

About 20 to 30 years ago, it was also the time where low costs airlines just about were getting traction. First, it was Southwest (in US), in the process killing several full-service airlines in US indirectly. Then of course were Ryanair and Easyjet in Europe. These airlines thrive on deregulation of the air passenger business in their own country (for Southwest) and continent (for Ryanair and Easyjet). If you study, how would an Irish based company (Ryanair) and a Texas based company (Southwest) thrive against competition which are based from higher traffic cities such as New York, Los Angeles, London, Rome, Paris etc? Where they are operated from, these are not the most high traffic places.

These low costs airlines do not follow the usual (past) airline business convention. To be able to compete on price and other means such as efficiency is their business model, with the main intention to carry people point to point - at very affordable price. Prices which were unimaginable, are now possible for mass public to be transported. It is not that we are better off that we are able to fly more often. Our ability to fly is due to there is a big shift in how this sector has changed. Flying should not be a luxury anymore.

Back to Airasia
Where Airasia is operating and competing and driving, it is the same as where Ryanair has been so controversially despised by many of their customers, partners etc. But think about it, they revived many of the smaller or older airports, making commuting easier and faster. Of course, at the same time, making themselves very rich. (Micheal O'Leary, Ryanair's brash CEO is one of the richest person in Ireland). You can also see that Airasia sort of made Malaysia Airport what it is today - that's why Tony Fernandes is furious with KLIA2 and KKIA more recently.

Companies such as Airasia and Ryanair of course changed the landscape of the airline business, pushing hard for deregulation - an area where they will thrive. Of course, Airasia is still fighting hard against MAS in Malaysia, Thai Airways in Thailand, Garuda in Indonesia and many other countries. But their business model is different, so much so that sometimes these airlines do not know how to react - to a low costs competitor. For MAS (where they had done), it cannot afford to compete on prices relying on the operational platform they are in. When it competed on prices, it lost more than RM1 billion in 2014, injuring Airasia as well. In the end, it was MAS whom surrendered first, although Airasia was also badly hurt. Think about it, should it not be a private company that is more seriously hurt competing against a government behemoth?

Ironically from there, Khazanah appointed Christoph Muller. In his resume, he was acclaimed as the turnaround specialist whom made it happened for Aer Lingus, the national Irish airline. He is expected to do the same for MAS.

No article in Malaysia carries his work in Ireland and mentioned whom he was up against. The fact is, he was against Ryanair. He did not really try to compete head-on with Ryanair as I would think he knows he would have lost. As in what we have seen in Malaysia where has been trying to do onto MAS, he made Aer Lingus more agile and smaller - and focus on what a full-service airline would do.

As in most turnaround stories, a person is considered successful if he is able to do complete the turning around, but in most cases, the winner is still your competitor - Ryanair in his case. He did not make Aer Lingus very profitable. Aer Lingus stopped bleeding - and that's success. I am expecting the same to happen in Malaysia. MAS would go smaller, while Airasia will be the one transporting more Malaysians. In Ireland that is the same, so much so that Micheal O'Leary would argue that Ryanair should be the national airline of Ireland rather than Aer Lingus as they transport more Irish than the flag carrier.

Where Airasia has gone regional

We have also seen Airasia is not just a carrier whom are operating off Malaysia. It is going after the regional business, much more difficult but needed. Why?

Flying in most part of Asia, it is not about inter cities within the same country but also between countries. In this sense, Airasia should seek to expand (as it already does) as it does not carry the baggage of a national airline where in Asia especially is a no no for one country's airline to be doing well in other people's country. It is much harder for SIA to propose holding stakes in another country's airline company as compared to Airasia, I would think - although SIA does own stakes in some other Asian countries. For SIA I would think, it is their national duty to bring more traffic into their own country rather than making strategic investments in another country's airline. That is also probably why SIA has offered Tiger Airways shareholders and making the Singapore based low costs airline go private. There must be strategic reasons from this and I am speculating that, the future growth of the business is low costs.

For Airasia, as it is going into many other countries such as Thailand at first, Indonesia, Japan, Philippines, India - it is not without challenges. In each of these countries there are already their incumbent. These are Lion Air, CebuAir, Indigo etc. and they are probably given preference by their own government. This is also why Airasia, as you have seen are facing countless challenges - but these are challenges it must overcome and learn from mistakes.

What investors today is expecting is Airasia to be profitable immediately from these ventures - so much so that there are negative valuations provided for these overseas investments. In actual fact, it should not be. If Airasia's venture is to be valued individually in their respective countries, there would be different value provided added up for Airasia as a group.

The fact is the international investments is pulling Airasia's value down as a whole. Are we saying that Airasia should stop holding stakes beyond Malaysia? Is we say no, that's what today's valuation is however telling us. (as an analyst, we are taught sum of parts - where we break up individual business or investment and value them separately. After that, we will tally them up into one valuation for the group. No analyst has done that for Airasia. If I were to ask to have the exercise differently, just value Airasia's Malaysian operation, what should be the value?)

Today, Airasia is being priced at below RM4 billion - i.e. not even USD1 billion. For the first ever low costs airline in Asia and how much it has done to achieve to where it is today, do you think it is worth less than USD1 billion? Of course, no PE ratio or dividend yield or even NTA would have provided a good valuation threshold. This is because Airasia is continuing to invest in overseas where it will create negative valuation to the group as a whole. People is putting huge value on hope and based on aggressive investments into Amazon and Alibaba (and Lazada, Snapdeal) - all e-commerce - for example but not on hope for a low costs airline business where there is also tremendous growth opportunities as well.

What Airasia needs to do is continue to push and survive during bad times while it grows in times - like now - where low oil price is beneficial for all airlines. If it wins in Asia (that means largest low costs airline in Asia), I am sure it will be a USD10 billion company in 10 or 20 years time - where I see a more open Asian skies.
Airasia's results seems about right although I expected its operating profit to be better due to the downsizing of its main competitor - MAS and lower oil price.
Anyone that has a quick look at the results would be shocked as it reported a net loss of RM406 million. However, before one trembles, take a look at what caused these losses. It absorbed RM625 million in losses mainly due to the conversion of Indonesia Airasia's owings into shares - to reverse the negative shareholders funds as required by the regulators in Indonesia. This shall I say is already expected and announced.

3Q15 Income Statement
However, what's exciting and as happened to most of the other airlines is that the low oil price is now allowing them to really make money despite the stiff competition. For the quarter, Airasia achieved a RM166 million Net operating profit. If you looked at the poor Ringgit strength, it seems that its forex losses seems to be cancelled by the gain from amount due from associates and jointly owned entities. It however hit them harder on the finance costs as lower Ringgit may costs them higher interest payment.

What's key in the results

One of the things that's noticeable is the challenges it faces in the newer markets that it has gone to - Indonesia, Philippines and India. As a result, do not expect these new ventures especially India and Japan to be profitable fast.

Airasia has also started to publish results for all its markets and provide its consolidated report. Notice the low right number of RM64.91 million...That's consolidated number in the event it is assumed as it has control over those companies.

Another point to note is that with oil price at around USD42- 45 per barrel, there is still room for Airasia to enjoy better margin due to low fuel price. For the quarter, its average price was USD77. I would expect it to be below USD 60 by 2016. Most airlines have hedged a significant part of their fuel causing them to still buy fuel at higher than spot prices. Most of them has lessen their hedges for 2016. (Notice that fuel still comprise of 38% of the total costs, hence making it the single highest costs element for Airasia and in fact for all other airlines)

All in all, while most may just be looking for a single headline, as shown below, if we look deeper, there are many positives especially for one of the largest airline in Asia and with such a deep discounted price.

Stock Pick 2016-Air Asia

Why I pick AirAsia-Cost RM1.30

Air Asia plunged to around RM0.80 range during its worst period last year, with perfect storm of Airplane crashing in Indonesia, Indon air control asking for Capital topup, and also the unexpected audit report from HK.

But, crude oil plunge further to current USD28 is a BIG positive to me.

I especially like felicity articles on Asia's budget flight and the prospects. I expected it to be one of the booming sector next 10 years and Air Asia stand a good position to become largest here.

My TP set was RM2 level, then longer term around RM3.50-4.00 if expansion in India, Japan, China, HK were to be successful.

WEAKNESS-the only weakness I think will be the many unexpected events such as crash, sudden spike in crude oil fuel price, and also their HIGH debts denominated in USD, thought they are longterm bonds. (Good thing they had launch USD1Bil funding).

Read research as below:

Aviation - Year 2016 – Recovery in Air Travel
  • We expect a gradual demand recovery for air travel in 2016 benefitting MAHB and AirAsia:- 1) Foreigner: Government is stepping up efforts in promoting Malaysia tourists destinations with a huge allocated budget of RM1.2bn for 2016 (vs. RM316m in 2015). Malaysia targets for 30.5m tourist arrivals (vs. 27.4m in 2014). 2) Malaysian: Gradually adjusting to the increasing cost of living and RM depreciation since 2015, increasing number of Malaysian will resume their travelling passion with adjusted budget in 2016.
  • In 2016, better structured capacity addition is expected to match the gradual recovery in ai r travel demand. Post capacity rationalization exercise in 2015, MAS will be more focused in expanding its domestic and regional networks, integrating with long-hauls (code-sharing), while AirAsia is also working towards equitable supply-demand growth.
  • With the drastic capacity cut in the system (by MAS) in 2015 and reasonable planned supply-demand structure in 2016, we expect continued yields improvement in 2016, benefitting airlines (i.e. – AirAsia, AirAsia X and MAS).
  • Jet fuel price has slumped further in 2015 to US$45/bbl and expected to stay low in 2016. The low jet fuel price will improve ai rlines profitability. AirAsia is expected to be the major beneficiary (jet fuel contributed 40-60% to airlines cost structure) of low oil price environment. AirAsia only hedged 41% of 2016 jet fuel requirement at US$63/bbl.
  • The depreciation of RM impact:- 1) MAHB: Positive impact from the higher translated earnings contribution of wholly owned ISGA in EU€. 2) AirAsia: Negative impact from higher translated cost structure (jet fuel, maintenance and debts) denominated in US$ (+18% YTD). However, the negative impact only partially offset the benefits from the slump in jet fuel costs (-35% YTD).


  • World crisis (i.e. war, tourism and epidemic outbreak), delay in KLIA2 completion, high jet fuel price and the development of high speed train between Singapore and Pulau Pinang.


  • Unchanged.


  • Low Jet fuel price.
  • Liberalization of ASEAN open sky policy.
  • Increased government budget to RM1.2bn for tourism.
  • Ringgit depreciated against US$.
  • Negatives consumer sentiments – Air Incidents and GST.


  • Maintained BUY on MAHB with unchanged target price of RM6.30 based on DCFE.
  • Maintained BUY on AirAsia with unchanged target price of RM2.00 based on SOP.
Also, felicity studies on Budget Airline was master piece.

I am wary of the fear in investing into an airline given the past experiences of many collapses - and Malaysia Airlines has been our closest example. Thai Airways did not fare well either. The list goes on and on. But those are the traditional airlines and their possible collapse could be due to the proliferation of low costs model. Airasia's drop however warrant me to look deeper into the company as I feel that it is managed by people who are capable.

Let's look at comparison of Airasia's successful peers (except for Tiger) than look at the non-performing ones. I have taken some examples of Ryanair, Easyjet, Cebu Air (Airasia's top furious competitor in Philippines) and Tiger Airways. Why did I chose those?

Ryanair - model low costs airline operating only in Europe
Easyjet - second to Ryanair and hugely successful as well
Cebu Air - as mentioned, Airasia's top competitor in Philippines. It is dominant there and Airasia is having a tough competitor. But it is predominantly a Philippines airline.
Tiger - well, nearest financially available competitor to Airasia. Not very successful and it needed injection of capital last year.

The significant names that are not here - Southwest (largest low costs in the world and operating only in US) and Lion Air (not listed). I did not pick up Southwest because over the last year, non-US airlines have suffered from the appreciation of US Dollar but benefited from the huge drop in oil price. US Dollar of course appreciated against many currencies and Malaysian Ringgit suffered the most. However, if one is to believe that USD could not appreciate much further, this forex losses will stop. No single currency will appreciate the way USD appreciated in the last few months and continue to appreciate. Think of what the consequences would be to US economy if that happens.

Anyway on the numbers, I have picked up revenue operating gain / loss, GP and shareholders funds. Why I did not use Net Profit is due to the forex loss that some of the companies experienced including Airasia which I do not think will be a long term thing. Fundamentally it is how well the company manages the gross margin as well as the fuel hedges.

The accounting policy for foreign exchange for Airasia is as below.


As below are the important numbers for the list of companies.

Airasia's of course is the Malaysian operation only where it can consolidate the numbers. Others are based on equity accounting.
While one can understand that Airasia's balance sheet is not that strong as compared to its stronger peers like RyanAir and Easyjet, I do not think that it is cashflow starved. One should note that Airasia's business model is to collect cash upfront and pay later. There is a period where it is benefiting from customer financing and that business model is great especially if applied to one's advantage. Airasia, to some extent have managed to use that to its advantage.

And based on its market value to its book value, would it be a reason to buy? Personally, I would say yes, especially for an airline which is still growing. There should be continuous competition but gone are the days where "everyone wants to own a low costs airline" as the barriers of entry is getting much much tougher.

Remember, the stock market in the short run is a voting machine, but in the long term is a weighing machine. What's substance is more important. Think of Airasia's substance.