Why we should look at beyond Price Earnings Ratio

One of the subjective area to look at in evaluating a business or listed company is not its Price Earnings, Price to Net Asset Value but its planning, vision, how it makes use of situation to make itself a leader in the future. Most professional analysts, amateur investors (like me) forget about that.

We more often than not concentrate on concession value, delivery, Price to Net Assets, total book order etc etc. Those are very much Graham and the old Buffett. The new investors including the new Warren Buffett, Softbank, some of the best PEs and VCs in Silicon Valley look way beyond what we see. That is why they were able to figure out Google, Uber, Grab, Facebook, Alibaba and many more.

I have to admit I do not have the capabilities and capacity to be in that realm. I do not have that opportunity as well as my universe of looking at companies does not include the very good startups or visionary companies that remain private.

However, among the local traditional companies, we can possibly decipher which company that look beyond its current as compared to those who do not. There are those we know is is danger of being or already been disrupted. Those are the transportation companies for example, media company such as Media Prima, TheStar for which I am not able to figure out where its future is heading.

The easier intangible investment is one where we see the macro picture - i.e. where disruption of affecting, and then we look at micro level and see at what stage is the position of the company. I will take one example. We know that e-commerce is in the midst of disrupting retailing, we then take several malls and try to figure out its positioning. Will it be disrupted? Is the space they are playing different. One example is IGB REIT. How do we see its future. Company or business like Mid Valley will not be disrupted like a taxi business being disrupted. It may face a slower growth. The much lesser malls may face a harder truth where they may not even survive at all, but perhaps not One Utama, MidValley or KLCC. They will face slowdown but not death in the short term.

Over in this, I would like to highlight 2 traditional companies where if they play it right, they can be part of the disruptor. If they are not, they will also be disrupted.

Airasia

18 years ago, Airasia was a disruptor to the traditional airlines like MAS, SIA. It is so successful, so much so that what we would have thought a business that is hard to survive has in fact caused continuous difficulties to MAS. It is now much bigger than MAS today and I am not able to figure out the survival of MAS beyond the next 3 years - unless there is another round of financial support from Khazanah.

Airasia, however is facing a new challenge. A wave of disruption to disrupt its own business. At the moment, its business model is being copied and airlines that are operating from a bigger airspace may want to eat into its market share. Its vast advantage in costs is also reducing as other airlines are now figuring out how to reduce costs as well.

Hence, it is now facing different challenges as it expands into other countries like India and Japan, 2 countries that are very different when looking at low costs tickets. India already has a very dominant low costs airline which is more competitive than Airasia India - Indigo. It is much larger, probably politically stronger and has more planes and better command of routes. Hence, Airasia in competing has to look at 2nd and 3rd tier cities. Luckily enough, India is such a big country that not one airline can dominate the airspace. It is more like China and US than Malaysia or Thailand.

To compete, I strongly believe that what the management of Airasia led by Tony Fernandes is doing is right. Going digital. By going digital, it is probably going to create that little inch of advantage as it goes regional. When Airasia was at its infant age, it started credit card purchase. That was a small disruption but its other advantages in the digital space was still early. Today, its booking system, checkin and others are ahead of many airlines including SIA - as I tried using Scoot. I happily admit Scoot still lose out to Airasia's booking system despite it not being perfect.

The community today is also more used or susceptible to self booking, payment, checkin etc. That is something which brings advantage to Airasia as it is trying to reduce its manpower per passenger. Airasia's digital strategy is beyond what I can imagine. I believe it is looking how to attract its recurring customer, minimising fuel costs, introducing new routes, new marketing channel, payment system from using its digital initiatives.

Going digital is what Airasia have to continue to invest and its push has to be continually better than others for it to continue to thrive.

Gamuda

Ironically, Gamuda is a company which I now look more in depth after the many situations where its projects was under the threat of being cancelled especially MRT2 underground contract that I now think that it is probably a lot ahead of other construction and developer companies in Malaysia such as IJM and UEM. My previous perception of the company, today I have to eliminate - not because I invested into the company but because now I look at the company more inept. This is because, my investment into Gamuda is still way too small to affect me, personally.

But Gamuda, with its group of management, knowledge depth has to be developed somewhat like Airasia rather than threatened. Most countries that are developed, has strong construction technologies and knowhow. We see that in Korea, Japan, China and previously US. We cannot continually be dependent on foreign technologies when building the country - like what we have done in the past government.

In my reading of several largest construction companies in Malaysia, the other construction companies in Malaysia - like I said even UEM and IJM talks about digital threat and taking advantage of it like how Gamuda sees it. This is unless these other companies do not communicate like how Gamuda does now - but I do not think so.

From here, I strongly believe, because it continuously in the discovery mode - like its investment in tunnelling technology, Industrialised Building System, this mindset is the right mindset for the future of the company. From here, as in any analysis, we should not just look at Gamuda's book order and how many future projects the current government is trying to introduce. We should rather look at how the company get readied itself towards the future.
To understand my writing further, do look at these companies Annual Reports and compare with its industry competitors.

Bought Gamuda and Sold MRCB

I decided to buy Gamuda as I thought that the selling was overdone. I was not around during that time, this trade was made in 8 November 2018.

Generally, I thought that the MRCB announcement of compensated for its highway was already accepted by the investing public. Despite selling, I still think that MRCB is still undervalued but I feel that Gamuda is a better bet in the long run.

I think despite both are not apple to apple, but Gamuda is a better company in terms of capabilities and capacities. Although it has lost several contracts like the MRT3 and HSR due to postponement, Gamuda is still a more solid company in the long run.

One can see that Maybank analyst is targeting Airasia

There is definitely going to be impact onto aviation business with the introduction of levy for travellers by government, RM20 for ASEAN and RM40 for non-ASEAN. Local travelling, there will still be no levy.

However, in reading the release here by Maybank, I think the opinion is wrong. How can Airasia and Airasia-X be impacted while MAHB is not impacted?

MAHB's revenue is dependent on passenger traffic. If ever, MAHB is more affected than Airasia's revenue is only about 30% from Malaysia, whereas MAHB's bulk of revenue is on passenger traffic.

His analysis is wrong.


Part of the article from STAR is below:

Maybank Research said the departure levy will negatively impact AirAsia and AirAsia X’s passenger load as their passengers are perceived to be price sensitive. 

Historical accounts are mixed regarding the impact of tax hikes on air travel; in Europe, it caused a multi-year traffic decline while in Hong Kong and Singapore, it merely reduced the traffic growth momentum ever so slightly. 

“The jury is not yet out whether the departure levy will kill passenger demand,” it said.

Maybank Research said the tax burden for international air travel will rise by 49% (within Asean) and 51% (outside Asean). 

MAHB is largely unaffected but it is negative for airlines. 

Airasia: The Maybank analyst may have gotten it wrong

The Maybank analyst in putting his opinion after a change in board and management structure in Airasia India may have gotten his analysis wrong. India despite opening up its doors for foreign participation is still a nationalist country. There are already rumors that Tony Fernandes is wielding management power over Airasia India and that does not bode well with the community in India.

The thing that Tony or rather the Malaysian team can do is to take its hands off the management control from within Airasia India. Just look at Airasia Thailand's board, it does not need to have board and management control.

I think the poor opinion over Airasia refocusing into 2 markets is wrong. What Airasia has developed is a franchise, and in a franchise, what is really needed is the development of its business culture and systems. Airasia as a company - believe it or not is the system, some initiatives as a group and then proliferate them towards their business units. Purchasing of planes, booking systems are for example centralised. Ground management are better off left it to the ground managers anyway.

This is what Airasia has done well and many investors do not see that this is highly valuable. One can put in the system and then deploy them to the subsidiaries. Many successful multinational companies have successfully managed their operations overseas these way and that is why several of these US companies are hugely successful as compared to Japanese and Chinese companies i.e. overly dependent on their people rather than local people. Seeing Tony and his team, he is very good at having hands off when things can be run without his local team.

As it is Airasia India is facing criticism over control from Malaysia and that is the best way to fend off that rumor. India being India will find new stories to attack and that is India.

If one tracks Airasia well, the demand on planes will also depend on the performance and need of each country. As it is I do not see there is less planes being allocated to Thailand despite Airasia Group does not have management control over that country. That is the way the franchise is being managed. Another thing which I am amazed is the appointment of a Thai national for its Group CFO position. Very rarely in Malaysian companies, we see that.

Hence, I do not see India is being forgone by Airasia but more of letting the locals manage the show.

As it is, as I have always said, Airasia is a different company. It is not just a Malaysian company but also a regional company. I just wish more Malaysian companies especially the ones that have regional operations to have such structure. The stock market needs more of this than the typical old structure. Without this, our country capital market will not be able to grow.

Capital Gains Tax may just kill our competitiveness

Please! Do not shoot ourselves on the foot.

When we did away with GST, I thought the government really meant what it promises. It certainly did not promise introducing various new taxes, though - hence long story short, eliminating GST is a mistake. Capital gains tax (CGT) is not a new kind of tax but for Malaysia and this region it certainly is unusual. All our neighbors and sometimes competitors certainly do not have CGT in their playbook. In fact, we have already lose out to both Singapore and Thailand in terms of our corporate tax rate of 24% against Thailand (20%) and Singapore (17%).

Now, we want to introduce something which is really going to be against business - capital gains tax. Malaysia's economy is an open economy and we most of the times will be competing against other neighboring countries. As an example, to enter the capital market some companies can now decide which market they want to get listed. An IT business that operates regionally, can opt for Singapore rather than Malaysia. Airasia for example can go to Singapore or even Hong Kong if it wants to list its group's business. The decision to pick markets to list on depends on how attractive each market is for the issuer.

Introducing CGT will certainly destroy that. In the long run, these kind of decisions which is to address short term problem will just kill our country's competitiveness for existing investors as well as would be entrepreneurs.

In the field that I am in, there is already concern over weak capital flow for both investors and entrepreneurs to tap on. Having a strong capital market means more Malaysians or regional entrepreneurs willing to tap onto as well as invest into our market, and that means more foreign long term money into the market. Do we not want that?

As it is, we have already complained of why did the most successful startup in our history - one that is valued in excess of $10 billion i.e. Grab moved from Malaysia to Singapore despite both the founders started them in Malaysia and being Malaysians. Singapore is just more attractive for them in many aspects and one of them is their ability to raise funds. By my count, Grab has raised more than $5 billion so far. (For one's visualisation, Grab is easily more valuable than Genting today - and capital market plays a very big role in that)

Introducing CGT is an antithesis to that effort of reversing the drain. The government must understand that to reverse brain drain - it is not just about creating job opportunities but it is also about having a conducive business environment. A conducive business environment also means a having and creating a vibrant capital market. Having CGT is hence sheer short sightedness if it is really being introduced.

More often than not, the capital market is pointed as the playground for the rich. It is not that true. It is more of a place for opportunity creation. People or entrepreneurs that would want to tap onto funding, will depend on a strong, consistent and vibrant capital market. As it is, I am seeing a sign of that being reversed by this new government.

If one reads Billion Dollar Whale, i.e. the story on Jho Low, one of the basic message on that story is that rich people do not play by one country's rule. If Malaysia is not friendly to their investment money, their funds can be transferred anytime anyday in an instance. Hence, does our government think that CGT is to tax the rich?

Before we start taxing them, their invested money will no longer be in the country in a flash. That's how fast it is - and does anyone get it. The super rich that we want to gain more taxes do not need to play by Malaysian rules. It will not be long before the not so rich but rich enough to invest in the capital market will be able to do that as well. Fintech companies will enable that and as it is there are already such business startups.

Despite what we may think, one of the success of Trump's administration is to have a swiping change in its tax structure - corporate tax of 35% reducing to as low as 21%. That effort was mainly to bring back businesses that have been locating overseas back to America and it has been hugely successful.

It is time for this government which we have such high hopes to stop being populists.