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.