On Airasia's private placement to the founders

I have written a lot about private placements. Some I am positive, most of them, I am negative. I have written about Airasia's private placement (PP) the day after the announcement of the PP to the founders on 2 April 2016. If you read many of my articles on Airasia, I actually prefer for a rights issue - and I meant it (why not), but if one is to study the exercise during then - 1 April 2016 (please look at the below chart) - they can't do rights issue at that point of time. The share price was climbing from a low of RM0.78 where many would have thought Airasia was a candidate for bankruptcy due to its debt. There was not going to be any bankruptcy as their debts are really long term with strong positive cashflow to support - period.

It will be deemed as Airasia was desperate for funds (from its public shareholders) and that would have been detrimental towards the company. Then, if the founders decided to put in and committed their own money, nobody can complain. If one can remember, the closing price for Airasia on 1 April 2016 was RM1.84 - and that was what the price for PP. There was no discount, unlike many of the PP that are announced i.e. up to 10% discount.

Again, I do not like the PP as I knew the founders gotten them for a good price and based on that article I wrote, if one know how to read the action well, investors could have purchased Airasia then at RM1.84. One would have gotten the shares similar to the PP price.

Again, on PP - one of my holdings - Ecoworld, actually is currently doing a huge PP of 30% (yet to complete as there are many rounds). Theirs to me is very fair. Why? The founders cum controlling shareholders commit themselves first at RM1.30. At one point of time, their shares were traded at RM1.22 and the founders still put in cash for more shares at RM1.30. That makes the entire exercise looks fair.

The one PP that is really bad is WCT's and I still keep my opinion to it.

I hope this explains.

What's wrong with the perception on Airasia?

Which stock in Malaysia probably has the most followings among fund managers overseas but yet it is still valued at below $2 billion? Airasia. It is over 50% owned by funds overseas, has more followings than any Malaysian blue chips and covered the most among Malaysian companies by Bloomberg but yet valued at a lower valuation that Grab. (Anyone knows Grab yet? - You know, if you mix around the entrepreneurial community, even Grab is no longer a Malaysian brand but more of a Singaporean now. I have nothing to comment here.)

Why?

For a young company in a still young emerging space, people expect it to be valued at low single digit PE, while people can allow Grab, Lazada to continue to lose money for many more years. We expect Airasia to start making profits in its new country that it ventures in i.e. India, Indonesia, Philippines, Japan but can forgive many others thinking that what Grab or Lazada does is "disruptive". Let me tell you this, Airasia has delivered for many years. Grab, Uber, Lazada and many more companies in the disruptive space have yet to deliver - financially. 

Now, my question is - isn't Airasia and several other low costs carriers disruptive? Are they too old now to be categorised under the air-transport disruptive space? There is even a difference between Airasia and many more of its competitors in its space - such as Tiger Airways (which was acquired by SIA), Cebu Pacific, VietJet, Indigo etc. Airasia goes into other countries but the others largely still operated within their own country they excel in.

For the moment, we are giving negative value for a company that attempts to go overseas. Typically, my question is do any of these guys know how business works? In my previous article on Airasia, there is this Deutsche Bank analyst who gave zero value to its businesses in Indonesia, India and Philippines (if I am not mistaken) after having invested hundreds of millions into the countries.

I am asking - if I want to get into a country and think strategically, then I decide to put a lot of money and effort and then to be negatively valued, is it worth the effort? To business people such as the founders of Airasia, it is not all the time valuation by analysts but execution that counts. It is about getting bigger, growing and taking risks - taking positions. How many Malaysian businesses think that way? Try looking at the KLCI Composite companies.

But yet we do not cherish the entrepreneurial spirits of this Malaysian company, and giving them a lot of challenges in our own backyard. For one, I do not see the differences in treatment that is provided to Airasia compared than Malindo for example. One may say, it is free-competition but what about the preferential treatment provided by Singapore to its own country airlines. (Do you see a Singapore Airasia?) Philippines is similar and so are India, Japan, Vietnam and so on.

Very few people put a price to Airasia's brand value. When I mentioned how important that they have managed to partner Tata Group in its penetration into India, I think very few people understands it. If I say, (despite the recent cases) Tata is the most respected Indian company, very few people sees it that way yet. But if we talk to business people that try to do business into India, having a partner like Tata is sign of success.

I have been following Airasia's reporting for many years. I would say it has improved a lot but a lot of times, these improvement is not cherished. Because it is such a well known Malaysian brand and so much followings among the international investors, it has to do more than many more Malaysian companies. I suggest these investors to read Focus Lumber, MagniTech's Annual Report (no disrespect to the investors of these companies) - not the financials - then do read Airasia's and go to its website. Do you see the vast difference?

(Until now, I cannot understand the business model of the companies I mentioned although I know Focus Lumber is into "Lumber" and Magni Tech is into "textiles".  That's all I can decipher besides looking into their accounts.)

If one can accept these companies (as investments) who are much more inferior in their reporting, what do we expect out of Airasia? Yes, they are challenged to the standard or reporting provided by the European, US airlines because often Airasia is compared against them - this is good. But the more you comply, the costlier it gets. (I am not against good reporting, but in fact pro it - however costs of reporting is a fact)

The recent case involving Rolls Royce - I see it as a problem (although it does not directly affect Airasia, as it does not do business with Rolls Royce as announced). This is because Airasia Group (or Tune) of businesses is so large that it involve many inter-company dealings and there could be much more scrutiny. I have to admit I myself am not too happy with some of the transactions, and there seems to be over-planning on its structuring.

As I said above, over time Airasia has adjusted a lot on its reporting format and continues to spend time and effort on improving the investing public's understanding on the group - but it seems the more they try to do, it has not translate into much.

As good as Tony Fernandez being a communicator, I think this part there seems to be a lack of trust towards the brand. He has gotten the message across towards the business public (such as Tata, Rakuten) but not the investment public and a lot more education is needed, as it seems.

MWE's huge misrepresentations. Does it impact WCE?

I remember I wrote about MWE a year ago. For a company who would have an earlier valuation of its land at RM31 million and later to have the same land valued at RM155 million (5x multiple) on the same year, this is really serious. I did not know SC and Bursa can still allow this to happen although they have helped smaller shareholders to get MWE to ask for an alternative valuation.

In this episode, imagine your controlling and largest shareholder signed a deal to sell the land for RM55 million thinking that market value is RM31 million. And several months later another probably a more well known property valuer gave an entirely different view, i.e. the land is actually RM155 million. Is this because the management erred or is it really something else? Can we now trust valuer?

This is an article which appeared on The Edge Weekly 2 weeks ago where they published it online.

I would like to remind that the same MWE is a substantial (2nd largest) shareholder of WCE. If not because IJM is there, I would have had serious second thought on buying the company.

Another thing I would like to highlight is that the party MWE partners with is Pristine Primavera, a subsidiary of Newfields Group of Companies (a company which is related to Seow Lun Hoo).

Ironically, Newfields is one of the party which advised on the rights issue for WCE (formerly Keuro) - see below. Even if SC is to approve, there seems like a conflict of interest as Newfields advised on the dealings of WCE where MWE is a major shareholder, and later for Newfields to do a huge business deal with MWE.

Another very fishy deal involving MWE happened 13 months ago. Tan Sri Surin Upatkoon proposed to do a privatisation of MWE at RM1.70, only for him to do a U-turn a month later. See below. This is almost like playing around with shareholders and he does not care at all.

On another related matter, remember Mamee's shareholders who are the 3rd largest shareholder in WCE - see who advised them for the group's delisting back in 2011/2012. They are all potentially inter-related.

In these episodes, there are 2 things I would like to call: really questioning the 2 professional companies Cheston Internaional KL Sdn Bhd (the valuer for the land in PJ and Newfields Advisors Sdn Bhd, the advisor for the WCE, Mamee)

Decline of full fledged airlines in Asia

I think this article is written by the same writer which I rebutted last few months on Airasia. Some of the writings are very true, some are to attract readerships.

Click to Enlarge

Generally, the landscape has been changing and people are taking planes being part of their occasional travel rather than it is a luxury. For the budget airlines, I am not that worried on the Middle Eastern airlines (like Emirates, Qatar, Etihad etc) in the long term. What I am more worried of are the Chinese airlines. The Chinese have the tendencies to throw prices with no fear over losses as the government tend to provide subsidies over areas that they want to support.
So far, I have yet to see Chinese government putting extra support over this but if it does, the other budget airlines - Airasia included should be wary.

This is what the Trump's government has been against - subsidies and China likes to do subsidies in areas which they are fighting hard for.

WCT: Hate private placements

I am not a shareholder of WCT. I took notice of a good construction company where it changed hands and seriously I thought it has moved to a more dangerous hand but one who probably can move the group further if the controlling shareholder does the RIGHT thing.

This new announcement, is all about the controlling shareholder does the WRONG thing. He does not care less about the smaller shareholders - EPF, PNB etc. included. WCT just yesterday announced that it is going to do a 10% fund raising through private placement. That itself smells rotten intentions.

Why?

First of all, the new shareholder (Tan Sri Desmond) bought the controlling share from the original founders at RM2.50. That is fine as although I do not really think that WCT is worth that much, to get control, you must pay premium. I also take note of the shareholder's need to improve its balance sheet. Hence, it has several options - rights, private placements, sale of assets as the most probably ones. It choses private placements and this is the worst one probably.

This is an option which may provide value to controlling shareholder but would be bad for smaller shareholders. It feels that the controlling shareholder is trying to get his portion (through proxies) at a cheap. This is because for private placements, it can issue its shares at 10% discount from market price (5 days average).

Now, the question is very clear. If Tan Sri Desmond bought his shares at RM2.50, would he allow additional shares to be issued at say RM1.60 (10% discount from RM1.77 current price at this point of writing)? And this is to external parties. If he is not protecting himself, he is not so clever isn't he? This means he is diluting his own purchase value.

I do not think he is that stupid to do this. And from the look of the market reaction, they probably know what he can do. Proxies! (I say can because I definitely do not know this is what he does, hence the name proxies)

This is the reason why private placement is WRONG. First of all, it should not be at up to 10% discount from market price. Second of all, it should have the first option to all current shareholders. Not new shareholders.

Private placement has been around as long as I followed the Bursa market since 1990s and this is seldom done in a good way to protect shareholders. Not always bad, but seldom is good.

It is quite archaic in terms of structure.

Ekovest's new highway(s)

This is certainly a surprise. Ekovest announced not another highway that it has gotten an approval in principle but 3 highways! These highways are named Kampung Baru Link, Istana Link and Kapar Link Expressway (as below).

Before anyone got excited (me included) these are non binding agreement as mentioned above. Basically, non-binding means that it is NOT CERTAIN. However, in most situations - they do have merits for Ekovest to announce them. Otherwise, no one would go to the process of looking through a detailed project such as a RM6.32 billion highway.

Very little information (or non at all) can be found on these links - which makes this announcement a big surprise. To be honest, I did not put any projections for Ekovest to secure (or bid) for new highways as I thought the Setiawangsa-Pantai Expressway is tough enough.

My little worry is whether Ekovest has taken too much than it can chew?

Anyway, who am I to say don't take on more jobs. If this thing comes fruition, I definitely look at it as positive and it seems Ekovest is going to be the largest highway operator in the country, after UEM. Larger even than IJM, I presume (in terms of value not length).

Now, the subsidiary that received the letter is not KESTURI (which is DUKE 1 and 2 which just sold a 40% stake to EPF) or SPE (under Lebuhraya DUKE Fasa 3 Sdn Bhd). It is another company - a 70% owned Lebuhraya DUKE Fasa 2A Sdn Bhd - not 100% owned.

The name itself, signifies it may have linkage to the current DUKE. However, one point to note - unlike other highways which are all within Kuala Lumpur, this one seems like it would have to pass through Selangor (especially Kapar Link). Kuala Lumpur and Selangor is different and we know the difficulty of getting it approved on another state front as land matters are under the state government. There was one highway which was cancelled and another - DASH which is still under consideration.

Well, these are too much of speculative thinking.

FGV's delisting?

So, when you do not do well and feel that the market is not fair towards your value, what do you do? Delist. In the case of FGV, it is not that simple. It is a lot of small shareholders and some big shareholders losing money - including EPF (which is our money) I presume.

I had an old article back in 2012 where I questioned the rationale of FGV being aggressive. At that point of time, I obviously did not know it is going to be so bad even. Expected EPF to even support its shares and it happened for a period.

I am glad that EPF is the first to pull back and see what happened to its shares. Hence, the drop in FGV shares is both poor management as well as lack of support from what is supposed to be their saviour. I would not put it that bad-ly but if I want, it (the script) was supposed to be some big fund to support a listed company hoping it should sustain the share price while the company will pick itself into its supposed value. It did not happen according to script. Hey! Happened well with IHH isn't it? (Can you see that it is just a joke.)

The party that caved in actually is not EPF but greed probably from a group of managers who think that they can go and conquer the world. They have not managed to and to the extent, could not even do well in its own backyard.

Now KWAP is fearing of a delisting as if it is to be bought back at say RM3.00, they probably would lose substantial - which is probably what the article below is all about.

To be fair to this new team of managers, they probably realise that doing M&As are not that easy. Good deals is when you wait (learn that from YTL) not when you charge towards your targets.

The current situation for FGV is when it has to do a lot of revamping over the poor management in the past few years. I remember it even went to acquire a Cambridge GRAPHENE company. Who really know what graphene is? Even if it is, would FGV be in the position to execute well on the technology?

See - to clear up mess is harder than to create them. What FGV should do is to go back to basics i.e. improving yield, market exposure, partnerships etc. etc.

The fact of the matter is that it is still a substantial size organization and has the assets to put itself back into position. Prices of palm oil is also getting friendlier towards its mission. (For those who particularly like export stocks, it is an export stock!)

And the major seller (EPF) is also out now but REALLY, the most important thing for FGV is to get back to work - not being creative in exercises such as listing and delisting.

Paramount acquisition of REAL: Private education trend

I was just reading Paramount's acquisition of R.E.A.L Education. One thing which makes me thinking is the below trend. In 2002 of 1% Malaysian student has now grown to 15% in 2013. Why says Malaysian do not have money? 15% of Malaysian kids is a lot.

I think it is a good move by Paramount i.e. it has gone defensive given that properties has its cycles.

On the flip side, however education as in healthcare has gone BIG into business - to me it is not right.

Deutsche Bank downgrades Airasia

Deutsche Bank just downgraded Airasia to RM1.75, which is below the price of RM1.80 where the 2 founders are committed to put in RM1 billion of new injected funds. Hence, I would suggest Tony and Kamaruddin to stop the private placement and instead do a rights at RM1.75 in which case is the fair price as provided by Deutsche Bank. It is also fair to all shareholders.

I however do have a comment on his paper, he commented that fuel price has notched up 33% and this would be a concern to Airasia. Actually, he did not remember that fuel price dropped more than 50% over the last 2 years from a height of USD120 per barrel. Today's price at USD65 is still about 45% lower from where it was paying for between 2011 - 2014. As close as 2015, Airasia (and most airlines) were still paying USD90 barrel oil.

In his paper which is not shared in the article, he also says that,"

Recall that Airasia announced its Board had approved the divestment of AAC ... In its 3Q announcement, the management said this leasing business had been valued at $1 billion. We struggle a little to understand how the number is derived, given the balance sheet numbers given in its 3Q16 results.

He further went on to say, our forecast does not include the impact from the AAC sale.

Seriously, I am perplexed. For an analyst, if he is looking at the current number from AAC's balance sheet, he will STRUGGLE of course because AAC is not just about current fleet but also future planes which AAC has secured. If a new leasing company is to negotiate for new planes, they will only able to get new planes perhaps from 2019 onwards (note that MAS mentioned they want new planes but only able to get fresh ones from 2019 onwards, and this is from last year's order) and probably at not so attractive price as Airasia group as the bulk buying is not there. Airasia's group of companies would also be the one leasing the planes from AAC which makes the leasing arm all the sweeter. This includes the future - hence he is struggling as he is looking at numbers alone, not business.

Also, if he is to say, the forecast does not include the impact from AAC sale - that is weird as even if Airasia is to not sell the leasing subsidiary, value is value. It is the same as AAC is already ring-fenced. It is part of Airasia hence the value of USD1 billion is still value of USD1 billion. If it is USD800 million, then it is USD800 million. He cannot say, he has yet to look at the impact from the sale especially if one is to use SOTP as the valuation method. He has mixed up fundamental valuation against technical reasoning.

Remember, "Value is what you get, price is what you pay." Further, in valuation method, he says he is using SOTP, which I assume is Sum of The Part valuation. Which school of SOTP is he from if he excludes AAC?

No wonder Deutsche Bank is struggling!

Note: Sum of the Part valuation is a method which one will take individual company from the group example MAA, TAA, AAC, IAA etc. do valuation based on its individual subsidiary or associate, after that sum them all together. Hence, he cannot not include AAC valuation be it internally or from external parties! Technically, if someone wants to downgrade, he/she should not use SOTP as SOTP is the most optimistic of valuation being provided for any company with several substantial subsidiaries. That person should be a technical chartist as charts can provide a price (not value) out of wag.

I also would like to note that based on his SOTP method, he valued Malaysia Airasia at RM0.88 which is around RM2.45 billion (2,782,974,080 x RM0.88). On the other hand, based on market value, he values Airasia's stake of 45% on Thai Airasia at RM2.701 billion. This means he values Airasia's 100% stake of a bigger MAA at a lower value than its 45% stake of Thai Airasia. As a note, 100% of MAA's profit this year (year 2016) is 2x 100% of TAA's profit.  Again, I am perplexed, for things which should include the future, he looks at current. For things which he should also include current, he looks at future.

He also gives zero value to Indonesia Airasia - i.e. zero value for all the hard work. I should remind Tony Fernandez of the day when he bought Airasia for RM1 from DRB-Hicom. Perhaps anyone would offer that to Tony for IAA?