WCE's new equity raising

I am an investor of WCE Holdings since 2014 and I hold significant portion of my assets in WCE. It is no coincidence that when its Annual Report is filed, I would take no time to go through them (especially the important portion).

This time, for 2017's Annual Report which was presented today, I noticed something new and significant which no one of us especially the minority shareholders do not know.

As some would know, West Coast Expressway has 3 forms of funding i.e. Government Support Loan, Commercial Loan and equity injection. That would be in the quantum as above i.e. RM2.4 billion (GSL), RM2.5 billion (commercial loan) and RM1.2 billion (equity).

While WCE has managed to secure the loans from the government earlier on in 2014 and all the debt financing by 2015, one of the component which it was supposed to raise is the equity portion.

It is also to be noted that the Redeemable Unsecured Murabahah Loan Stocks (RUMS) is issued for RM990 million and it appears that the profit rate is 10% - quite high for my liking. This is a 40 year instrument. (If I am not wrong, it could potentially for tax reasons, it is structured this way.)

Also, would like to highlight that none of this instruments was mentioned either in the press or the AGM (which was held late August 2016) although the issuance was done on 12 Jul 2016.

Note: A reader below has highlighted that the loan stocks is issued by WCEHB to WCE Holdings. Hence, the equity issuance is still needed.

Moving from DKSH to Tunepro and Ekovest

After reading the article on DKSH, I decided to reduce my position on DKSH. In the long run, DKSH is still a strong company and I believe its business model and positioning is very strong.  It will be the least impacted by the revolution in retailing that is happening now - at a very fast pace i.e. a lot of purchases are moving towards online. Just a note, I have made more than 20 transactions purchasing things online from buying shoes to padlock to fridge this year alone. That was from zero online purchase 2 years before.

That behaviour of mine is going to affect traditional retailing as I can really see the effects that Jack Ma and Jeff Bezos are impacting the traditional business lines.

Anyway, the reason why companies like DKSH may probably not be enjoying very good growth for this year is due to the prolonged impact of GST as well as weak Malaysian currencies. In fact, the blame on GST I think is not as correct, but most probably the weak Malaysian currencies as well as reduction of subsidies are really affecting many people on the streets. This as mentioned is going to affect DKSH who is distributing goods such as milk, cheese and pharmaceutical products.

On the other hand, I am putting my money on Tune Protect which has dropped from circa RM1.60 to now RM1.12. I am also putting more money into Ekovest.

The reason I am putting money into Tune Protect is because it is largely tied to how well Airasia's volume performance. IT IS TRUE that Tune Protect is affected by the ruling to bar automatic add-ons by Malaysian Aviation, however I felt that the price dropped is already compensated by that ruling.

The general thought is that with the barring of that automatic add-ons, it has affected Tune's revenue by some 35% - 40%. The below graph by Airasia in its slide presentation says that it has dropped by 39% on a per passenger contribution basis.

With that drop, Tune Protect's travel insurance business should hence start from this piece of situation. I believe that it is now growing in tandem with Airasia's passenger volume growth which is low double digit - from 2017 onward. In the long run, as long as the travel insurance business is tied to Airasia's growth - it should be above average.

Tune Protect is also building its other parts of insurance business i.e. motor, personal accident etc. The deregulation of the motor insurance rates may provide opportunities for Tune Protect to be more aggressive and winning market shares as its business model is less complex against the more traditional insurers whom have been around for a longer period.

Anyway, lets see as I purchase 8000 units of Tune Protect for this portfolio.

I have also added 5000 units of Ekovest as I feel that the impact of IWCITY - whom may not be bidding for the Bandar Malaysia will be minimal towards Ekovest. I felt that the drop in its price is an opportunity for me to add-on to the company - and this also follows my thoughts of having Airasia, WCE and Ekovest as my 3 main holdings.

One should note that the contract that Ekovest has is for the upmost long term - up to 50 to 60 years. As in any country, once a contract has commenced - it will be almost impossible to terminate them - be it there is a government change.

The case of IWCITY and Bandar Malaysia is different as it was not effective yet - although my initial propagation was that it was not going to be terminated.

Anyway, as I can see for Ekovest it is now completing half of DUKE 2 and has already commenced Setiawangsa-Pantai Expressway.

Those will be the main revenue generator for the group in the long term to come. I also do not think the market is putting any value towards its new projects such as River of Life and the proposed highway to Klang.

Why I would buy Petron over Hengyuan

There is no doubt that I like companies that tend to be able to control their own destiny. I also like companies that are operating in oligopolistic arena, but yet they act like it is open competition. These kind of companies will tend to do well as they are competitive. Some of the petrol retailing companies are such in nature.

The downstream operations of O&G for the listed companies in Malaysia

As I have mentioned before in previous articles over here and here, Petron may have some advantage due to its competition that exists. In this business, there are 5 players (in the order of size) - Petronas Dagangan, Shell, Petron, Caltex and BHP (under Boustead). It is also quite obvious that we can see they are sized up in such order. Petronas being the local player and supported by Petronas in terms of supply. Shell has been one of the largest and earliest player. It also had a refinery which can produce 156,000 barrels per day (bpd) - which was sold to Hengyuan.

Petron exists from its acquisition of Exxon Mobil's (merger from the two) retail operations. Caltex is a unit of Chevron and understandably it gets its supply through import. BHP is a smaller unit owned by Boustead where it purchased from BP (British Petroleum).

From above, it sounds like it is a crowded market. It is true that it is a crowded market especially if one does not have the supply and support. Hence, I believe that all the players have their own supply support. It is also known that Petron's supply comes from Exxon as highlighted below.

Hengyuan bought the refinery which on paper can produce 156,000 bpd from Shell Refinery. In that exercise, Hengyuan took over a RM1 billion debt from Shell from that operation. In return, Shell which still operates more than 900 petrol station in Malaysia promises purchase contracts so that its supply is guaranteed. What Hengyuan now needs to do is to make sure that its petrol is Euro 4M compliant and it has to meet that deadline by next year.

It is also a known fact that if the sale to Hengyuan did not materialise, Shell could have converted the refinery into a storage facility. That was a drastic business change and this could also mean that Shell was not willing to invest further in Malaysia. Having Hengyuan picking up and willing to invest have changed Shell's direction. It is now buying the refined oil from Hengyuan for its Malaysian operations. This also means that it trust the quality that Hengyuan's produces.

I have also wondered what makes Shell not interested in the refinery but it will continue to operate the retailing business. Like Exxon, it could have also sold the Malaysian retailing arm - but understandably this is not the direction Shell's went for.

That could mean that the IRR is not attractive enough for an oil giant such as Shell but good enough for Hengyuan, a smallish refinery back in China. At the same time as well, Chinese companies are busily acquiring assets overseas and they could have good support from their government.

Although it looks like quite similar, the two exercises - Petron and Hengyuan - have vast differences in terms of post exercise strategy.

Petron will need to obtain the trust from the final retail customer as the brand is not a name which we are familiar with. It needs to work on many things on the B2consumer front. On the other hand, Hengyuan needs to invest more on the refinery - getting good margins from the crack and sell to Shell at a predetermined price (MOPS).

Needless to say Petron, while still needing to get its refinery efficient as well, will have the harder task. The reward however is more fulfilling as it "can control its own destiny" better. The more it gets consumer trusts, the better it will become. As the final price at the pump is now based on a certain formula - largely following MOPS, margin volatility could also be lower for Petron - as it is less dependent on the demand and supply of crude at any point of time as its produce is sold at the final pump price.

Hengyuan on the other hand is like the furniture manufacturer for Ikea where Ikea controls the supply and demand. Raw wood will be supplied by Ikea - the furniture manufacturer will try to manage the costs - and later sell the manufactured furniture to Ikea back. I do not like this kind of position although one can also make good money.

I like the position where one buys the raw crude from Exxon and I determine myself how one sells its finished products. Do I go aggressive by signing more commercial contracts and opening more stations or do I go slower.

At the end of the day, if I sell the produce where my brand is carried that should worth more money. This is like if you are a Nestle and carry your branded products rather than being white labelling company providing processed chilli sauce for Maggi brand - which you think would be more valuable at the end of the day?

Of course, to sell your own brand - it is a different strategy altogether. Hence, I do not think one should do an apple to apple comparison based on a similar PE.

It will take a big "Leap" for people to show their net worth

I am reading the new third board that Bursa is introducing. I feel that not many people would be bothered as it is only open to people of High Net Worth and the definition is as below.

Although the full detail is yet to be unveiled, I can almost be sure that the above which is open to high net worth individuals is there. One can read the full article, on the Star here or below.

Market works best when it is open to the public - not a certain group of individuals. When there is lack of liquidity, there is little market. I know of a certain work (given to and managed by Cradle) that is done to attract high net worth individuals to invest into tech startups and they will get to enjoy tax breaks. That has not done well. Firstly, even in today's age, very few people is going to share their net worth - and moreover these investors will find their investment having little opportunity to be cashed out.

On top of that, if I can invest anywhere in the world, why would I be bothered to let my income and net worth be known. There are enough areas and platforms to invest into if I have the means and knowledge.

The traditional public listing in Bursa, the arranger will charge a high fee for one company to get into the market. In the "Leap" case it will be lower as mentioned below - but I doubt that it will be low either. Startups or SMEs will not be willing to pay anything more than RM500,000 to get their fund raising. This platform is moving towards that kind of fees.

Investment is also a place where there is competition. And I will compete in places where I have a higher chance to win. Leap is not that place.

Collusion between MAS and Malindo?

As an investor, I do look at pricing to understand where some of the companies stand (Airasia especially). I have been following pricing by Malindo and MAS as well besides Airasia. As previously mentioned, I notice that pricing by both Malindo (soon to be Batik Air) and MAS (Firefly) has actually gone up since 2014. These trend is actually going the opposite direction against oil price which has dropped around 40% from then on.

Recently, there is this trend where there seems to be pricing collusion between Malindo and MAS (I say Malindo because it seems to be the bigger airline flying off Subang). Two - three weeks ago, I noticed that Malindo was pricing its tickets at RM129 while MAS was pricing them at RM128.

Today it is RM139 by Malindo and RM138 by Firefly (owned by MAS). See below.

Malindo's minimum pricing for its ATR flights

Firefly's flight pricing

Does the Malaysian Competition Commission really exist?

Airasia is just killing competitors locally

When I wrote the article on Airasia and MAHB working together, I meant to be for both to do well. You know whenever I read the monthly traffic report by MAHB, there is feeling that MAHB just wanted Airasia not to be doing well. That strategy just failed although Malindo and MAS probably treat the MAHB people better. (I am just speculating but that is a norm - especially when dealing with a Group CEO like Airasia who can be difficult and loud.) Why I say this, just read the report by MAHB - it may sound neutral but it is not.

But just look at these numbers as above for example which came out today (10 July 2017). Airasia is delivering and taking up market share. If you look at the ones on yellow box, one can already see it. Which airline does local flights in KLIA2? Airasia only. Which airlines do local flights in Malaysia through KLIA Main? MAS and Malindo. Airasia's June 2017 against June 2016's number grew 16.6% while those that went through KLIA Main dropped (surprise? - as this is a Raya month for 2017 as against 2016 which was in July 2016)

Note: It is harder to analyse numbers for KLIA Main as all other airlines use that terminal as against only Airasia, Airasia X and perhaps Tiger and Jetstar use KLIA2 (in a small way i.e. flight from Singapore)

Perhaps some of the traffic went to the international flights for MAS and Malindo as they probably have reduced their quantum of local flights in Malaysia. Or it could also be their load factor just dropped.

Just note that one should not look at year to date numbers or LTM numbers for comparison as Malindo moved from KLIA2 to KLIA Main last year 14 March.

Let me tell you - based on my observation (and not just from the above table) - Airasia is just flying in terms of bringing traffic as against its main competitors. For Airasia, it is not just load factor that has gone up but also its margin from higher ticket prices and lower fuel costs (as against several years ago). The main costs for Airasia that has gone up is the higher purchase price (from foreign exchange) for new planes and staffs costs. But yet again that happens to its competitors as well. The new planes that it brought is apparently this time is not to replace the old ones but to increase its total seats - and that is because it cannot meet new demand.

I am not just optimistic on Airasia because of my investment that I made 2 years ago but because they are continuously outperform my expectation. I think the message to MAHB is to just face it - Airasia is to dominate in the future - it will probably do the company well - unless higher traffic and profitability is not the main agenda for MAHB.

Airasia and MAHB should just communicate more

It seems we have no choice and Airasia has less choice as well. Most of Malaysian airports are operated by a single operator - MAHB and that will not change in the next 5 - 10 years. There are (almost) no competitors. The entire KLIA2 seems to be for Airasia and Airasia X. I know Airasia is now a regional airlines and they could have focus their energy and routes into Thailand, Philippines or India for example, but MAHB is not stupid to know that Malaysia is probably still the most profitable base for Airasia.

I was at KLIA2 a week ago, and I noticed the self check-in machine can now print baggage tags. From this, I thought that I do not need to queue to check in my luggage anymore, but that is not so. I was telling the Airasia's staff that was assigned to help those to do self check-in that the printing of tags does not change anything as I still have to queue to to deliver my bags. She agreed. As I would have thought, there is a missing step which Airasia would pursue in the future.

From reading the below article (http://www.thesundaily.my/news/2017/07/09/tony-fernandes-slams-mahb-allegedly-failing-provide-bag-drop-machines), I guess now what the self-service printing of tags are for. In some airports, once can actually do self check in of bags, hence reducing manpower costs - i.e. part of better automation which we need.

Tony Fernandes slams MAHB for allegedly failing to provide bag drop machines

PETALING JAYA: AirAsia Group CEO Tan Sri Tony Fernandes has criticised Malaysia Airports Holdings Bhd (MAHB) for its failure to offer the low-cost carrier baggage facilities at its airports throughout the country.

Expressing that he was "fed up" with MAHB, Fernandes claimed that the airport operator had promised 30 bag drop machines this month.

"Zero and now they say no budget!!!!!!!!," he said in a Facebook posting yesterday.

Fernandes also claimed that AirAsia Bhd CEO Aireen Omar had offered to pay for the machines two years ago, but MAHB had insisted on providing the facilities.

Calling on MAHB not to behave like a "monopoly", he further praised the Senai Airport in Johor, describing it as a "hard working private entrepreneurial".

The airport is currently operated by Senai Airport Terminal Services Sdn Bhd and one of the few in the country not operated by MAHB.

"We need more 'Senai airports' in Malaysia. Create more entrepreneurs. More economic activity. Hope the new (MAHB) chairman Tan Sri Syed Zainol Anwar Syed Putra Jamalullail and (MAHB chief strategy officer) Azli (Mohamed) will sort out the mess," he said.

My reading of this is also bringing to me that actually there is very little communication between MAHB and Airasia. I think both are at fault as it could have been resolved amicably. I know and I have also complained before MAHB is really monopolistic in behaviour, but that is what we have to put up with in Malaysia. Unless, Airasia does not intend to operate Malaysia as a significant base.

As mentioned, Airasia has some negotiation power as it is not an airline that is dependent on Malaysia alone - but still close to 50% of its passengers are using Malaysian airports (those that are run by MAHB). I guess both parties have to suck it up  - and I have to admit it will not be easy to do for both the bosses - as MAHB can really act like any Malaysian GLCs. 

Why was Esso sold to Petron

As discussed in my earlier article, Exxon would probably be lesser interested in downstream operations of a mid-size country. My biggest question when Exxon sold the Malaysian downstream operations to Petron - was why would Petron be sold at RM3.59 per share or at total valuation of RM939 million back in 2012.

The final Net Asset value on the books for Esso Malaysia before sold to Petron

If one is to refer here, Exxon basically sold a 88k/bpd refinery (albeit an old one), 560 petrol station business where 420 assets are owned (a very valuable asset), 10 fuel distribution terminals (very valuable as well) and the rights to the retailing business (even more valuable) rather than one starting and building the business one by one - which is almost impossible. Think about it. That to my surprise was sold at a valuation of below RM1 billion.

If one can remember, Petron Philippines which bought the 65% stake, subsequently offered to purchase all the remaining 35% shareholders at the similar RM3.59 offering. About 8+% took up and that is why they now hold 73+% of Petron Malaysia. I made a reference to the Independent Advise by Kenanga during then, which one can read them here and here. Basically, what Kenanga advised was for the 35% minority shareholders to not accept the deal as it was deemed unfair.

For those whom do not intend to read the advise, basically Kenanga based upon the advise from Esso Malaysia's past performances and dividends that it had provided prior to 2012. Needless to say, I am not impress with the information that was provided as they have not much data to provide beyond the past performances.

Something more that was amiss that it missed out in the advise. Esso Malaysia was sitting on very old assets which probably have not been revalued. I am not able to determine what are the Revised Net Asset Value (RNAV) for these assets as most probably these assets are never revalued. It is good to note that for Esso or Petron now, these revaluation is not important as the exercise would probably benefits WTW or Raine and Co rather then the shareholders. However, during a disposal, usually these are done - but in this exercise during 2011/12 it was not considered at all.

In the last probably 9 years of Petron's / Esso's disclosure, these assets are not revealed but I managed to dig through and see what was disclosed in 2005. Many of those assets were bought decades ago and how much would they be valued now? Note that there are 420 of these petrol station assets.

Some of petrol station assets in KL

Some of assets in Selangor

Even more petrol station assets in Selangor

Assets in Perak

Assets in Negeri Sembilan

The ones which I picked are a portion of what they revealed in the 2005 Annual Report. Subsequent to that, Esso (later Petron) just picked the top 10 assets to disclose. Anyway, as in many businesses, I would agree that these assets are for its business and there are little possibilities Petron would be selling them - unless they are really strategic or the assets may not produce the return that is expected of them from the petrol marketing business.

Another key point in the agreement between Exxon, the seller and Petron is the supply. What probably is key is that (as provided below) Petron gets its continuous supply from ExxonMobil. This works both ways as Exxon gets to have its product taken up while Petron's refinery continuously gets its supply. One should note that for a refinery, consistent supply is very important if one is not able to get the supply from its own fields (which Petron does not have any).

Without yet looking at the business profitability and future prospects, one should note that these are very key features for Petron Malaysia to continue to position itself among the downstream players.

My observation is that Petron Malaysia at this stage - its hardest period is perhaps a thing of the past. The early 3 years, I felt that it was at the stage where it had to prove to people as Petron is a new brand in Malaysia - it could have gone the Projet direction, and maybe not as well received as we see in BHP. The way I see it is that Petron is now at ramping up stage.

I have also been asked on my observation on Hengyuan (which purchased the Port Dickson refinery from Shell) as against Petron Malaysia. Again, I am not an expert in this, but based on what I am able to gather Hengyuan seems to be a capable refiner (which is why the Shell petrol that you buy in Malaysia most probably all of them come from Hengyuan's refinery). However, on its operational efficiency, that has yet to be seen as Hengyuan which fully completed the acquisition in early 2016, it seems to me has yet to make the upgrades towards  the current refinery.

On the other hand, Petron Malaysia has done so after taking over the business since 2012. It has managed to be Euro4 compliant. To me, at this stage Petron seems to be the safer hands for an investor but that does not necessarily mean that Hengyuan will not be a good investment in the long term.

Whether Petron Malaysia is expanding its refinery business, that has yet to be finalised. I believe the management would have weighed the situation carefully and smartly. Malaysia itself has enough refinery capacity for our own usage especially for gasoline consumption. And at the moment, Petron's 88k/bpd seems to be not fully utilised. Or it could be going for a much efficient one in the long term. From what I have read, Petron may look for other downstream opportunities from the potential new refinery - i.e. petrochemical products.