Highlights:

1.  Chinwel is one of the largest manufactures of fasteners in the world and South East Asia. It has completed its Vietnam plant expansion and may benefited from its US and Europe exports where they need a lot of fasteners from their automotive and heavy industries.
2.  Main future growth drivers come from its DIY fasteners where its margin is higher (mainly export to US) and upgrading of its galvanized wire production line (to be completed in FY19).
3.  Extensive global sales and distribution network with diversified clientele base and wide range of fasteners and wire products (over 3000 types) and it exports about 64% of its products to Europe, US and Middle East
4. High average dividend yield (about 5%) for FY2018 which is higher than bank’s FD rate. Historically, Chinwel has been generous in dividend payout over past 14 years based on its consistent earnings and cash flow.
5.  China wire rod price (raw material of fastener) has dropped 20% in recent two months. Normally wire rod price of china may lead to the price trend of Asia like from Vietnam where Chinwel may import. This downtrend of wire rod price may help Chinwel to expand its fasteners’ profit margin for FY2019.
6.  Demands of Chinwel’s fastener are projected to remain strong in FY2019 due to two main factors - less competition from China because of clamp down on non-environmental friendly fastener factories and stronger demand on the back of an economic recovery in Europe.
7. The fair forward 12-month PEx should be in the range of 9x-10x which translated to RM2.0 to 2.2 based on FY19 forecast EPS of 22 sen.

 

Company Background

CHINWEL is a manufacturer of carbon fastening products (screws, nuts and bolts) before diversifying into production of wire rods products (galvanized wire, annealing wire, hard drawn wire, PVC wire & grill mesh) following the acquisition of 100% of Chin Herr Industries in 2013. Today, manufacturing of carbon steel fasteners and wire rods products have remained CHINWEL's two core businesses. In 2015, the acquisition of the remaining 40% stake in Chin Well (Vietnam) which manufactures fasteners mainly for exports from Vietnam.

In FY18 ended June, fastening products contribute about 76% of total revenue. Chinel is now ranked as one of the largest suppliers of fasteners in the world and South-East Asia with exports accounting. Europe still remained the group's biggest export market, accounting for 42%) of the total group's revenue in FY18. CHINWEL’s wide range of fasteners are significantly used in highway guard rails, power transmission towers as well as furniture. To enhance the growth prospects going forward, CHINWEL has moved up the value added chain via its expansion into the higher margin DIY market for fasteners and high security fences and gabion for wire products.

Fundamental Data

Currently Chinwel is trading at trailing PE Ratio of 8.3 (based on current price of RM1.66) with EPS of 19.98 sen. Chinwel has performed relatively well as reflected by its performance in the latest five financial years results. Between FY14 and FY18, revenue increased YoY to new high while the EPS also improving upward. This superior showing has strengthened the balance sheet, as shown by the group’s strong cash position between end of FY13 (-RM61.1m) and end of FY18 (+RM44.6m). Chinwel has distributed decent dividend in past 5 years also contributed to accumulated dividend payout of 34.0 sen. CHINWEL has maintained its generous dividend policy of paying out at least 40% of its net profit to the shareholders over the past 5 years.

Source: http://www.malaysiastock.biz

We can observe that the net profit of 12MFY18 (55.8 mil) which is 10% higher than full year profit of FY17 even under challenging business condition. Chinwel has performed respectably in the cyclical steel industry as reflected by its performance in the latest five financial years. It has good dividend yield of 4.82% and NTA of RM1.87. More importantly, it has been distributing dividend over past 14 years (except FY2009) and the dividend has increased from 2.5 sen to 8 sen from 2004 to 2018 as shown in the figure below.

 

Source: http://www.malaysiastock.biz

 

Key Financial Data

Let us go through some key financial data (included latest result) of Chinwel as table below:

	Trailing 12M	Past 5 years average
Average PE	8.41	9.98
ROE	10.68 %	10.23%
Ebit margin (%)	11.36%	12.11%
ROIC	13.92%	13.1%
Cash & Equivalents (mil) (include other investment in fund which is liquidable)	115.9	93.6
Total borrowings	74.2	61.5
Dividend yield (%)	4.82%	4.45

 

We can observe that Chinwel achieves small improvement but quite stable in ROE, ROIC, Ebit margin, ROA and dividend yield ratios for trailing 12 months vs past 5 year average result. Chinwel is a net cash company although they have undergone some acquisition and expansion in past 3 years.

For a more comprehensive evaluation, I have used 10 metrics to evaluate FLB. pls refer to the table below for the details of the points scored by Chinwel (this section is not for public at this moment).

Prospect and Fair value for FY2019

The profit growth of Chinwel lies on two core businesses in FY18. The dominant fastening products show sharp profit rebound (+RM10.3m YoY) which more than offset the decline in the wire rod segment which is partly caused by forex loss. The EPS has risen YoY in three out of the four quarters of FY18, particularly sharply in the 4QFY18. CHINWEL outperformed heading into FY19 with the 1Q19 result’s EPS up YoY as well as QoQ to 5.90 sen. Revenue also expanded at its quickest pace YoY (+28%) for the eighth straight quarter.  Profit expanded further in the dominating fastening products arm (+RM0.4m YoY) from an elevated base in 1QFY19 while for wire products, profit rebounded (+RM1.6m) from the sharp fall in FY18.

The raw material of fastener is wire rod. The future prospect of the Chinwel is depending on demand and cost of their raw material supply. Let see China raw materials (wire rod) chart as below:

Source: http://www.sunsirs.com (Wire Rod is raw material of fastener)

From the chart above, we can observe that the price of China wire rod has dropped significantly (20%) in recent two months.  Normally wire rod price of china may lead to the price trend of Asia like wire rod price from Vietnam where Chinwel may import. This downtrend of wire rod (raw material) should help Chinwel to expand its fastener profit margin for FY2019.

Chinwel benefited from the clamp down on polluting factories in China

Let us go through a news related to Chinwel from Theedge:

Source: http://www.theedgemarkets.com/article/chinas-crackdown-polluting-factories-helps-boost-demand-chin-wells-fasteners

Demand of Chinwel’s fastener is projected to remain strong in 2019 due to two main factors - less competition from China because of a clamp down on non-environmental friendly factory operations and stronger demand on the back of an economic recovery in Europe.  This can be witnessed by the increase of record revenue and higher profit in 1Q19 result.

Besides, Chinwel's expansion would be in Vietnam where labour supply is comparatively more consistent.  Chinwel will add more production lines in Vietnam to cater to rising demand of its new fasteners which could speed up construction work. In Europe, negotiations are on-going with 3 important customers for DIY fasteners.

Besides, the upgrading of Chinwel’s galvanized wire line is in the progress and is expected to be completed in FY19. The upgrading will enhance the production efficiency and reduced the product cost. Chinwel had commenced the building of an automated warehouse in its Shah Alam land and the construction is expected to be completed in the FY19.

 According to Zion Market Research, the global industrial fasteners market is projected to grow at about 5%+ CAGR until 2022 (market size of USD116.5bn).  Chinwel is raising the output of DIY fasteners, rebar connectors and wire mesh products so that they will contribute 30%-40% of group's revenue in coming 3 to 4 years from 11% currently. The group has completed an expansion on its plant for these products which are produced in Vietnam and Penang. At present, the bulk of Chinwel's construction grade fasteners (lower margin compared to DIY) is sold to Europe which contributes 40%-50% of the group's revenue.  

FY2019 Results Sales of wire mesh products may increase due to potential large orders from the Middle East and South Asia region. The US market is also likely to make a comeback for the DIY fasteners (made in Vietnam) in 2019. 

Based on Chinwel’s future stable earning (moderate growth is expected), sustainable high dividend payout from strong balance sheet, the fair forward 12-month PE for should be in the range of 9x-10x based on EPS of 22 sen (translated to RM2.0 to 2.2) which is consider reasonable valuation for a leading fastener company with strong present in Europe market where they need a lot fastener from its automotive and aviation industries.

Risk

1. Rising labour cost (foreign workers levy and min wages increment in 2019)
2. Weaker EUR and USD currencies as Chinwel is an export-oriented company.

 

If you interested on my analysis report, please contact me at davidlimtsi3@gmail.com

You can get my latest update on share analysis at Telegram Channel ==> https://t.me/davidshare

Disclaimer:

This writing is based on my own assumptions and estimations. It is strictly for sharing purpose, not a buy or sell call of the company.

Before we start, let us read a news from Sabah chief minister as below:

Source: https://www.nst.com.my/business/2018/11/434725/sabah-mulling-permanent-ban-log-exports

 

Highlights:

1. FLB has shown improving profit margin and growing revenue in recent two quarters due to much better profit margin and stable log supply. Trailing 12-months EPS of FLB is 21.65 sen and next few quarters should be able to achieve EPS of 5-7 sen per quarter based on current plywood price.

2.  High average dividend yield (about 10%) for FY2018 which is higher than bank’s FD rate and other downstream timber stocks. Conservatively, FY19 dividend yield should be able to maintain at 5-8% based on its future earning, 91 mil cash, zero debt and current ratio of more than 10.

3.  Management of FLB has been generous in dividend payout over past 7 years except FY17 where there is some problem in log supply in Sabah.  Total dividend paid over past 7 years is 65 sen (average 9.3 sen per year).

4.  The fair forward 12-month PEx should be in the range of 8x-10x which translated to RM1.92 to 2.4 based on estimated FY19 EPS of 24 sen.

5.  Strong balance sheet with zero borrowing provides high margin of safety under current uncertain investment environment.

6. Its business model does not require high capital expenditure and its generous management provide a good defensive investment option for those looking for stable and high dividend yield stock.

 

Company Background

FLBHD operates in two business segments: Manufacturing and Electricity. The Manufacturing segment is comprised of plywood, veneer and laminated veneer lumber (LVL) operation. The Electricity segment is involved in the generation and sale of electricity; it reuses bulk waste to generate biomass energy to supply electricity to the group’s manufacturing plant. The biomass power plant is also located at Keningau, Sabah.

Plywood is the FLB’s main product, which is commonly used in various industries such as the Recreational Vehicle (‘RV’), home decorating, construction and furniture industries. Currently, FLB produces mainly thin panel plywood of which the thickness is below 6mm. It also produces thick panel plywood ranging from 6mm to 18mm. Another product is veneer, is a thin sheet of wood which is used to form the building blocks of plywood. In March 2010, FLB started the production of LVL, which is commonly used in the construction industry for structural integrity, production of high-value furniture, housing materials and value-added products. FLB uses recycled wood chips and veneer slips to produce like products, targeting the US, Taiwan and Japan markets. FLB does not own any timber concessions and the Forestry Department of the State of Sabah controls the volumes that can be harvested every year. FLB sells the majority of its products at prices denominated in USD; 73% of the FLB’s revenue was derived from exports to the US market. The group has also started exporting products to Thailand in FY2017, which accounted for around 2% of total sales.

Between FY2012 and FY2016, the group’s revenue trended upward from RM132.8m to RM201.5m, with the Manufacturing segment comprising 99.9% of its total revenue throughout. The group’s core earnings increased steadily from RM11.8m in FY2012 to FY30.8m in FY2015, but fell by 43.9% YoY to RM17.3m in FY2016 due to lower profit margin. In FY2017, FLBHD’s performance worsened with lower revenue (RM176.0m) and core earnings (RM11.7m), although Debt to equity ratio remained at zero and cash balance stayed healthy at RM34.3m.

 

Fundamental Data

Currently FLB is trading at trailing PE Ratio of 7.21 (based on current price of RM1.56) with EPS of 21.65 sen. Its revenue, profit margin and net profit has shown big improvement in recent two quarters as shown in the figure below:

Source: http://www.malaysiastock.biz

We can observe that the net profit of 9MFY18 (21 mil) which is 90% higher than full year profit of FY17. In addition, it has shown big improvement in net profit margin (14.1% vs 7%). Actually gross profit margin of FLB in 3Q’18 is improving as compared to 3Q’17. Let see the result of FBL in 3Q’18 as below:

Source: 3Q18 report

As we can notice from the above table, the gross profit margin has improved to 28.8% in 3Q18 from previously 10.6%. Both gross and net profit improve due to stable supple of logs and better average selling price of their products. In addition, higher other income of 1.93 mil mainly due to forex gain of 0.96 mil which still accounted for small portion of their total profit before tax of 15.02 mil. This indicate that over 85% of their income is generated from their main business operations.  

Its Return of Equity (ROE) is 12% (more than 10%) which indicates that it is quite effective in generating return (profit) from its total net asset (equity).

It has strong dividend yield of 10.26% (distributed 3 times of dividend in 2018) and NTA of RM1.79. More importantly, it has been distributing dividend over past 7 years (except FY2017) and the dividend has increased from 6 sen to 16 sen from 2011 to 2018 as shown in the figure below.

Source: http://www.malaysiastock.biz

 

Key Financial Data

Let us go through some key financial data (included latest result) of FLB as table below:

	Trailing 12M	FY2017
Average PE	7.21	13.58
ROE	12%	6.83%
Net profit margin (%)	14%	7%
ROIC	42.2%	19.57%
Return On Assets (ROA)	6.88%	6.39%
Cash & Equivalents (mil) (include other investment in fund which is liquidable)	91.4	98.72
Total borrowings	0	0
Dividend Paid per share (sen)	16	-

We can observe that FLB achieves improvement in ROE, ROIC, net profit margin, ROA and dividend yield ratios for trailing 12 months result vs FY2017. FLB has zero borrowings and it has cash (include investment in short term fund) of 91.4 mil. The net cash per share is 86.6 sen which is 56% of the current share price (RM1.54).

For a more comprehensive evaluation, I have use 10 metrics to evaluate FLB. pls refer to the table below for the details of the points scored by FLB (this section is not for public at this moment).

 

Prospect and Fair value for FY2019

The prospect of the FLB is depending on log supply (their raw material). Let see the a new that Sabah government has banned a log export since May 2018, as shown in the following news:   

Source: https://www.thestar.com.my/opinion/letters/2018/06/23/ban-on-log-export-good-for-timber-industry/

Another factor the can affect profit margin of FLB is the selling price of log (material cost). Let see the log price published online as figure below:

Source: https://www.indexmundi.com/commodities/?commodity=hard-logs&months=12

From the above two figures (log and plywood), both of the selling prices of log and plywood have decreased recently. This indicates that FLB should be able to maintain its gross profit margin (last qtr 28%) as both their material and product selling are in the same price trend. As long as market demand for plywood can be sustained (or small drop), FLB should be able to achieve a better YoY result in current quarter (4Q18) and maintain its attractive dividend payout.

 

Let us see FLB prospect as below:

Source: 3Q18 report

With higher sales and higher profit margins that FY2017, I expect FLBHD’s performance in FY2018 to improve significantly as compared to FY2017. Based on 9MFY18 results and selling price of plywood, my full year EPS forecast is at a range of 24-26 sen and the estimated dividend payout for FY18 is 18 sen (16 sen already paid). Demands of plywood in FY19 should be sustainable as higher demand from Japan (Olympic related construction)

Based on FLB future potential earning growth, sustainable high dividend payout from strong balance sheet, the fair forward 12-month PE for should be in the range of 8x-10x based on EPS of 24 sen (translated to Rm1.92 to 2.4) which is consider reasonable valuation in downstream timber processing industry where FLB is backed by 91 mil of cash (market cap just 161 mil).

 

Risk

1.      Rising labour cost (foreign workers levy and min wages increment in 2019)

2.      Rising log price and shortage of log supply in Sabah (due to investigation of illegal logging)

3.      Weaker USD currency as FLB is export oriented company.

 

If you interested on my analysis report, please contact me at davidlimtsi3@gmail.com

You can get my latest update on share analysis at Telegram Channel ==> https://t.me/davidshare

Disclaimer:

This writing is based on my own assumptions and estimations. It is strictly for sharing purpose, not a buy or sell call of the company.

Highlights:

1. Pecca’s FY19 domestic sales volume expected to grow, where sales order from main customer Perodua is still going strong especially for the Myvi model. Further sales from new Perodua SUV model (going to launch in Feb).

2. Export volume to Singapore in FY19 improving from 1Q and 2Q19 (Oct - Dec 2018) according to Management guideline.
3. Due to Myvi clearing their backlog orders and Pecca currently receive high Myvi lether seat order in this quarter and quarter in 2019.

3. High dividend yields (over 6% based on 5 sen payout in a year, comng 3 sen on 12 Dec) at current Pecca price which are higher than bank FD rate and other automotive stocks. 

4. Current cash in hand (97M) (53 sen per share) and good free cash flow from operation provides sustainability of the future dividend payment.

5. Strong balance sheet with zero borrowing provides high margin of safety under current uncertain investment environment.

6. Current ex-cash PEx of Pecca is only 4.5x (mean we pay only 26 sen per share for their biz without considering its 97M cash due to Pecca still can maintain their earning even without the cash). (based on 79 sen current price)

7. The fair forward 12-month PEx for should be in the range of 14x-15x (14x PEx is due to their very attractive ex-cash PEx at only 4.5x and strong order from Perodua) which translated to RM0.91 to RM1.04, where this valuation is supported by future potential earning growth, sustainable dividend payout and strong balance sheet with 53 sen per share which consider reasonable valuation in automotive sector.

9. Its business model does not require high capital expenditure and its prudent management provide a good defensive investment option where the company have increased their capacity from 120,000 to 170,000 units annually without using their IPO proceeds while it has distributed 5 sen dividend over past 3 years while still maintaining 97M cash.

10. Pecca’s director Datin Sam has acquired 5.06 mil shares from open market (price range around 76 sen) which indicates that management team think current price of Pecca is undervalue.  

Pecca Group Bhd is an investment holding company. The company through its subsidiaries is engaged in manufacturing, distributing and installing leather upholstery for car seat covers and aircraft leather seat covers. It also supplies leather cut pieces.

Pecca is the market leader in the automotive leather upholstery for OEM passenger vehicles in Malaysia. Pecca Group’s current business activities are predominately in the automotive segment. However, the Group continues its effort to penetrate into the aviation segment. The automotive segment includes the following:

1. Leather cut pieces for the Original Equipment Manufacturer (“OEM”) segment.
2. Pre-delivery Inspection (“PDI”) segment (customers include Nissan Malaysia)
3. Replacement Equipment Manufacturer (“REM”) segment.
4. Aviation segment currently involves the provision of repair and restoration of non-structural cabin interior parts and material under the Part 145 Repair Station license granted by Civil Aviation Authority of Malaysia (“DCA”). On 1 March 2018, Pecca submitted an application for Production Organization Approval (POA) to DCA to confirm our capability to do manufacturing.

Geographically, Pecca’s products are exported to Singapore, the United States, the Netherlands, Australia, Japan, New Zealand, United Kingdom, Ireland and Hong Kong

Fundamental Data

Currently Pecca is trading at trailing PE ratio of 13.6 (based on current price of RM0.79) with EPS of 5.8 sen. Its profit has been declining over past 1 year but improving in the recent quarter 1Q19 as shown in the figure below:

Source: Malaysiastock.biz

Pecca’s profit in FY18 declined to RM10.2m (-30 % YoY) and revenue decreased to RM112.6m (-8% YoY) due to lower gross profit margin from automotive segment. The Automotive segment accounted for 95% of total revenue. Geographically, Malaysia market remained the largest contributor to the group’s total revenue, accounting about 83%. However, recent release quarter result shows improving in net profit margin to 12.8% with 3.47 mil profit. 

Pecca’s financial position has been strong since IPO in 2016 where it has ZERO borrowings. As at end of 30 Sept 2018, Pecca has cash and cash equivalent of 97M which is equal to share per share of 53 sen (about 67% of market capital).

In addition, Pecca has relatively high dividend yield at 6.3% based on current price. It has been paying 4-5 sen dividend over the past 3 years as shown in figure below.

Source:  Malaysiastock.biz

To evaluate whether Pecca is still able to maintain its high dividend payout of 5 sen, let see the FCF (free cash flow) from operation from its latest quarter report as below:

Let have a look on Pecca’s free cash flow (after minus out capex of 6.2M) vs market capital ratios as below:

FCF (for FY18)/ Market cap = (15.88M-6.2M) / 141 mil = 6.9% (over past 12 months)

Cash in hand / Market cap = 97 mil / 141 mil = 67%

High level of cash in hand and good cash flow and zero debt provide the sustainability of the future dividend yield (more than 6% or 5 sen annually which is higher than FD rate).

 

Future growth catalyst

The IPO price of Pecca was at RM1.42 in 2016. Pecca is the market leader in the automotive leather upholstery with over 40% market share where their main customers are Perodua, Toyota, Nissan, Honda and Proton.

Pecca's major client Perodua's best seller Myvi car and upcoming brand new cars launch (Perodua SUV, Toyota Vios and Toyota Yaris) will continue to provide room for growth for Pecca. Besides, there are some capacity, which is about 20% for exports (mainly to Asia like Singapore). I understand that Pecca is the sole leather seat supplier for the new Perodua SUV, with orders expected to come in by Dec 2018 or Jan 2019 (to be launched in Q4’18). Pecca also reconsider to tender to supply leather seats to Proton CKD SUV (X70) but margin in for Proton SUV is low.

Let us go through the following news to estimate how much orders Pecca have received in Oct - Dec 2018:

https://paultan.org/2018/10/05/perodua-myvi-22000-units-yet-to-be-delivered-as-of-end-september-efforts-to-reduce-backlog-ongoing/

 

Due to Myvi clearing their backlog orders and Pecca currently receive high Myvi order in this quarter and quarter in 2019 (due to Myvi production halt in Aug and Sept, zero Myvi leather delivery in Sep), Management expects stronger earnings in the coming quarters (Oct-Dec 2018 and 2019). FYI, Pecca is Perodua sole OEM leather seat supplier. 

Another Pecca's future growth catalyst would be their aviation division where they are awaiting Production Organization Approval ("POA") from Department of Civil Aviation ("DCA"). This POA will enable them to supply to major airline companies in Malaysia for commercial aircraft seat cover replacement. Currently, Pecca's has the approval from DCA for part refurbishment and leather upholstery job scope. This limited scope has generated minimal revenue but has great potential once they obtained POA as they would be able to target potential businesses from Airasia and Malindo. 

With its high cash pile level, Pecca is constantly exploring potential new acquisition. Once a new acquisition is completed, I believe Pecca earning will improve and may become a growth stock in FY19-FY20 with high dividend payout from its existing automotive leather business. 

For automotive segment outlook, the Malaysian Automotive Association (MAA) reported that TIV for Sep 2018 dropped to 31.2k units (-23.7% YoY; -52.3% MoM). The Sep 2018 sales volume was down due to reintroduction of SST during the month as most customers have brought forward their purchases during the tax holiday Jun-Aug period.

However, year to date TIV improved by 6.9% YoY to 455.0k units, driven by the strong demand during the waiver period of zero-GST.  MAA still maintain its 2018 vehicle sales forecast of 588.1k units (+2.0% YoY).

Lastly, let us see the material price movement (downtrend) of Pecca where the reference is from Producer Price Index by Commodity for Skins, Leather, and Related Product as figure below:

Material cost reference of Pecca (source: https://fred.stlouisfed.org/series/WPU041)

Let also see the total car vehicles sales by brand as the table below:

Source: CIMB, MAA

 

SWOT analysis

Let me have a SWOT analysis on Pecca as below:

SWOT analysis (S-strengths, W-weaknesses, O-opportunities, and T-threats)

Strengths	Weaknesses
High dividend yields (6%+) which are higher than bank FD rate.   Current cash in hand and FCF provide sustainability of the future dividend payment.   Strong balance sheet with zero borrowing. Its business model does not require high capital expenditure	The revenue of the Pecca is quite concentrated as a few major customers (Perodua, Toyota) and risk of losing major customers.
Opportunities	Threats
Opportunity to venture to the aviation segment but pending approval from DCA in granting the POA (Production Organisation Approval), which will enable Pecca to commence commercial aviation refurbishment contracts. New earning from new Merging & Acquisition (M&A) business which management stated plan to complete by end of 2019.	Rising labour cost Weak MYR to USD rate which may cause their raw material cost to increase (believe some material need to be import).

Based on Pecca future potential earning growth, sustainable dividend payout from good FCF and strong balance sheet, the fair forward 12-month PE for should be in the range of 14x-16x (translated to Rm0.91 to 1.04 with forecast EPS of 6.52 sen) which is consider reasonable valuation in automotive sector average valuation

Risk

1. Rising labour cost (minimum wages increment in 2019)
2. Slower than expected sales in major customers like Perodua and Toyota
3. Weaker export sales if economy slow down in Asia.

 

If you interested on my analysis report, please contact me at davidlimtsi3@gmail.com

You can get my latest update on share analysis at Telegram Channel ==> https://t.me/davidshare

Disclaimer:

This writing is based on my own assumptions and estimations. It is strictly for sharing purpose, not a buy or sell call of the company.

Highlights:

1. At the time of writing, both WTI and Brent oil have fallen more than 20% from their four-year highs last month, putting them in bear market territory. The latest catalyst for crude's plunge was OPEC's monthly report that said production from the cartel and Russia had continued to climb in October, more than offsetting losses from Iran’s supply.
2. 84 Aircraft (AAC) disposal has been almost completed (RM4 Billion proceeds have been received so far), Airasia will become a NET CASH airline company (from 0.76x net gearing now) as the cash proceed of AAC sale will be more than RM4.1 billion (Tony reiterated special dividend in 4Q18). The selling of aircraft is expected to be completed by end of Nov 2018.  
3. One of the most efficient management teams and super competitive cost structure of Airasia make them still profitable even at the Jet fuel price of USD90 per barrels (where many other airlines are operating at loss).
4. Airasia still expanding their capacity even in high fuel price period with aggressive pricing which they keep increase their market shares in Malaysia, Thailand, Philippines and India.
5. With 29% YoY increase in fuel costs, Airasia’ net operating profit (net finance costs) fell only 18% YoY in 2Q18, with a net operating profit margin of 12.4%. This margin clearly outperforming most of the Asian airline sector’s results. 
6. 25% of Expedia stake disposal has been completed. The proceeds from this disposal is USD60 mil with initial cost of investment of 10mil. There will be an one-off disposal gain in 3Q18 result of about RM210 mil.
7. AirAsia has ordered with 100 A321neo aircraft. The A321neo (seating up to 240 vs 200 A320 model) will help Airasia to meet ongoing strong demand in congested airports in Asean as well as further reduce their cost per Available Seat Kilometer (ASK).
8. Digitalization progress well which show the company’s ambition to transform from an airline into a global technology company. The digitization employed technologies (Big data, AI and IoT) which can improve in area of ticket sales targeting, speedier check-in (using face), reduce flight delay (AI to predict weather)
9. Airasia exhibits growth element from its growing revenue and earnings growth prospects in long term (especially when oil price come down in future). It can generate good profit from its airline business (even at high fuel price period) and big potential from its digital venture.
10. Management stated their plan to reward shareholders with special dividend in every two years on top of 20% dividend policy on their operation profit.
11. Key risk lies in surge in jet fuel oil price and USD appreciation which may affect its operation cost.

 

New Airbus A321neo in 2019 help to reduce cost per KM (all existing Airasia aircraft is A320)

Many existing airports are running at full capacity where they are quite congested (like Penang, Kota Kinabalu, India airports). To grow it carried passengers with the same airport size or capacity, Airasia need to employ a larger aircraft like A321neo. Seating up to 240 passengers in a single class layout, the A321neo will enable the airline to increase capacity while benefitting from the lowest operating costs in the single aisle category. 

A321neo can help Airasia to move 240 passengers (vs A320 of 200 passengers) per flight without sacrificing the carrier’s quick 25-minute turnaround time. This aircraft will also help to reduce cost per available seat KM (CASK) for AirAsia and enable them to continue grow in the larger Asean markets which suffering from limited airport capacity today.

Let us see one of the airlines which has received A321neo claim that this model is more efficient in term of cost per seat. 

Souce: https://www.flightglobal.com/news/articles/hawaiian-predicts-big-unit-cost-advantage-from-a321n-445310/

AirAsia has ordered with Airbus for the purchase of 100 A321neo aircraft. The A321neo will help Airasia to meet ongoing strong demand as well as further reduce their cost per Available Seat Kilometer. Airasia is set to receive their first batch of A321 neo in 2^nd quarter 2019 and they will be more competitive at that time.

How High Jet Fuel Price Affects on Airasia’s cost?

Almost all airlines operation cost is highly correlated to jet fuel price. No doubt Airasia’s cost is also correlated to jet fuel price but Airasia has shown in previous two quarters that it able to minimize the effect of fuel cost by increasing their aircraft’s utilization hours and carried capacity. To know the key indicator of an airline operation cost, we need to look at its Cost per ASK (Available Seat Kilometers). Let us go through the cost per ASK for Airasia when it experienced high jet fuel cost in 2Q2018 as below:

Source: 2Q18 report

We can notice from the table above Cost / ASK (sen) increased by 4% to 13.77 sen as compared to 13.22 sen YoY when Average Fuel Price (US / barrel) has increased from 69 to 89 (increased 29%)

Airasia manage to maintain low level of Cost / ASK in 2Q18 is due to the following reasons:

1. Higher capacity (more new aircrafts à higher available seat and fuel saving of A320) lead to higher passengers carried which can bring down the unit cost or cost / ASK.
2. Higher aircraft utilization (13 hours per day) and route rationalization.
3. Cut other related cost to reduce the cost / ASK ex-fuel.

In addition, their net gearing has improved to 0.76x (net debt of 6.2 billion) from previously 0.9x (1Q18). Net cash inflow in the quarter amounted to RM58.4 million due to repayment of loans for aircraft of RM2.04 billion.

Let see the Auguest 2018 statistic of KLIA2 passengers as published by Airport Berhad Malaysia (Theedge news) as below:

Source: http://www.theedgemarkets.com/article/mahb-sets-dedicated-clearance-facility-klia2-airline-crew

Remember, Airasia still achieved relative good profit under Jet fuel price of USD89 in 2Q18 while MAS reduced 189 weekly flights and Malindo reduced 385 flights and terminates 3 domestic route.

Source: Refer to page no 3 of the Airasia 2Q2018 result presentation slides.

Below is a quick score chart in percentage for overall Airasia quality which comprise Of Earnings Outlook, Digitalization Progress, Pricing Power, Balance Sheet Strength, Defensiveness Against Highter Fuel Prices, Defensiveness Against Forex Risks, Management Quality, Information Disclosure and Stock Trading Liquidity

Below is a market share chart of Airasia of 2Q18 vs 2Q17.

 

 Source:  Airasia 2Q2018 result presentation slides

Below is a aircraft fleet growth chart of Airasia for its Asean market in 2Q18.

Risk

1. Further depreciation of the MYR against the USD. A stronger USD will pressure Airasia’s profitability as a significant portion of its operating and financing costs are in USD.  
2. Surge in jet fuel price which may cause unit cost to ASK to rise on jet fuel (currently about USD90-92).

Short Summary which includes recent development:

Negative factors:

1.  Weaker than expected coming Q3 result to be released by end of Nov, due to high jet fuel price in Q3 and weak regional currencies (RM, Rupiah, Peso etc)

2.  Higher leasing cost due to sales of 84 aircraft

3.  RM20 and RM40 departure tax from June 2019

4.  USDRM strengthen to 4.19

Positive Factors:

1.  Special dividend of 70-80 sen to be paid in Dec 2018 or Jan 2019

2.  One-off gain of its Expedia booking site at USD50M (RM210M) which concluded in Aug 2019 which to be reflected in coming Nov result

3.  Much lower depreciation cost in P&L due to sales of 84 aircraft

4.  Jet Fuel price dropping to USD86-87+ (from earlier USD94-96)which lead to lower operation cost

5.  Strong load factor in Q4 of 85% and above for their forward ticket booking

 

If you interested on my analysis report, please contact me at davidlimtsi3@gmail.com

You can get my latest update on share analysis at Telegram Channel ==> https://t.me/davidshare

Disclaimer:

This writing is based on my own assumptions and estimations. It is strictly for sharing purpose, not a buy or sell call of the company.

 

 

Highlights:

1. The reported accounting loss of RM7.2M of 4Q18 result is mainly due to non-cash impairment losses (goodwill and software development cost) of 8.8M. Exclude these impairment losses, its operation actually still generated profit of RM1.6M (vs 1.48M of 3Q18 result).
2. After these impairments, Mmode has a very clean non-current assets of just 5.6M, but with a very high level of current asset of 75.2M (mainly consist of cash of 43M and deposit & prepayment of 20M). Mmode actually is a zero-debt company with highly liquid current asset of 75.2M vs market capital of 54.5M (current asset per share is 46.2sen vs market share price of 33.5 sen).
3. Up to 31 May 2018, secured orderbook is RM360M (latest outstanding of orderbook is about 298M due to 62M already converted to revenue in past 4 quarters).
4. Latest 4 quarters results show the average net profit margin of construction segment increase to 7.5% (refer to Segmental Information of latest report for 4.62M profit from 62.2M revenue). This profit margin is moderate and should improve in coming quarter.
5. The two major projects of Mmode are H2O of Ara Damansara and The Shore at Kota Kinabalu. Expect completion date of H2O project is on 31 Dec 2018. Based on my survey from site photo (refer to next section), online and facebook’s contacts,  H20 project already completed in July and developer (T company) already started to deliver the vacant procession letter (mean early completion by 5 months) to house owners. This mean Mmode should has billed his client (T developer) for the remaining RM33-35M H2O project value in 1Q’19 (Jun-Aug 2018, going to be released in Oct).
6. Another Kota Kinabalu project (Sabah) has good progress from the site photo survey. The photo taken in Aug shows piling works already completed and progressing to build the structure of the building. Remember Mmode just secured this project in June and this progress shows its efficiency and fast progress by completed the piling works within 2 months (expect to claim 7-10% of 260M from T developer).
7. Construction materials are waived of SST which may benefit Mmode where it quoted T developer for its Kota Kinabalu project before June 2018.
8. New big shareholder, Ong Chee Koen bought 14.15% shares via off-market on 22 June 2018 at 57 sen. Total Direct Business Transaction share is 31% at 57 sen on the same day.
9. The estimated EPS for coming 12 months is about 5.6 sen. With forward 12-month PEx of 8x-10x, the fair value based on EPS of 5.6sen of Mmode is 44.8 to 56 sen.. With consideration of 50% of its cash, there are high margin of safety (backed by 26.6 sen cash per share with high earning visibility from Sabah KK project) (refer to appendix 1 for cash flow analysis of 4Q18 result)
10.  Coming querter result (to be released in Oct) will have contribution from H2O (about 35M revenue) and Sabah KK project (maybe 5-10% of 260M).
11. The risk lies in delay in the completion of projects and rising labour cost.

PS: Current asset is cash and any other company asset that will be turning to cash within one year from the date shown in the heading of the company’s balance sheet.  

 

H2O project site PHOTO as per end of July 2018 (look like completed, online surveys indicate that developer already handover to unit owners)

 

Sabah's Project site PHOTO as per mid and end of August (piling completed & started structure works)

Site photo above of Kota Kinabalu project can exhibit more on the progress and efficiency of Mmode (as they just secured the project in June 2018).

Kota Kinabalu (http://www.theedgemarkets.com/article/mmode-bags-rm26057m-job-mixed-commercial-project-sabah)

 

 

Source: Site survey 

Piling stage normally more challenging in construction as you may hit rock etc during this stage, once piling works completed, other works like structure build up works can be fast. If construction works can be faster than schedule, it can save labour, equipment rental cost and also early delivery of project which enable it to take another new project.

 The prospect and profit of a construction company depends on the ability and timely execution of the project in hand where Mmode has shown excellent progress in both its H2O (early completion) and Sabah KK project. 

 

Prospect and Fair value for 2018 and 2019 (upcoming 12 months)

Let us have a look on the profit forecast (upcoming 12 months) based on its construction orderbook only as below:

Construction Projects	Estimated net profit margin	Net profit
H2O Ara damansara (*about 34M outstanding)	7% (based on past four qtr reports)	2.4M (should be recognized in coming Oct result as already completed) (early completion)
The Shore Kota Kinabalu (260M outstanding)	7% (based on past four qtr reports)	7M (assume 100M work completed within 12 months as site photo shows fast progress)
RM6.64m of Earthworks and Ancillary Sitework (*completed)	Completed	-

*estimated from their qtr reports.

Estimated Total net profit from construction = RM9.4M (12 months)

Mmode currently in the mid of disposing its mobile contents businesses (from recent announcement). Let me assume there are no profit but about 0.3M loss contribution from mobile contents disposal.

Mobile contents Subsidairies	Estimated loss post disposal	Net loss
Axiata Project	Refer to announcement on 27 July, 7 Aug, 24 Aug	0.3M

 

Estimated Total net profit from both construction & Mobile contents (disposed) = 9.4M-0.3M = 9.1M

RM9.1M translated to EPS 5.6 sen.  With forward 12-month PEx of 8x-10x, the fair value based on EPS of 5.6sen of Mmode is 44.8 to 56 sen. Bear in mind Mmode is still holding 43M cash (cash per share is 26.6 sen excluding 9M performance bond prepayment) with zero borrowing.

With consideration of only 50% of its cash, there are high margin of safety and Mmode has good profit visibility from its Sabah 260M project in coming 2-3 years.

 To estimate the possibility of Mmode securing new project, we have to look on Titijaya Berhad new project plan. Titijaya targets to launch a few projects totalling RM826m GDV in FY19 (2H18) which include: a) Damai Suria Phase 1 (GDV  of  RM168m,  b) 3rd Nvenue@KL  Phase  2  serviced  apartment  with  (GDV  of  RM338m,  and  c)  Riveria  City@KL Sentral Phase 1 serviced suite (GDV of 320M).

Mmode has shown its capability and efficiency in construction project execution in H2O and Sabah KK project where it has completed H2O project 5 months earlier than its due date (Dec 2018). Based on these track records, it is possible Mmode can secure new project from Titijaya or other developers in future.

 

Construction Profit Margin Analysis (based on result ended 31 May 2018)

The following tables show the latest construction revenue and profit margin of Mmode from H20 project.

Source: Q4’18 report

From the tables above, the average construction net profit margin for past 4 quarters is about 7.5%. This is helped by last quarter construction profit which is about 16% (1.419M profit / 8.487M revenue).

 

Risk

1. Delay in the completion of the H2O project
2. Rising labour cost (min wages increment in the future)

 

If you interested on my future analysis reports, please contact me at davidlimtsi3@gmail.com

You can get my latest update on share analysis at Telegram Channel ==> https://t.me/davidshare

Disclaimer:

This writing is based on my own assumptions and estimations. It is strictly for sharing purpose, not a buy or sell call of the company.

Appendix 1:

Cash flow analysis (31 May 2018)

Some of you may notice that the cash of the company has fallen to RM43.6M from 46.9M. Don’t worry, the small drop in cash of Mmode is due to it has just paid off some of its creditor. We can notice that ts payables has fallen from RM16.8M last quarter (28 Feb) to RM5.9M (31 May). Let see the following table for your reference on its cash in hand and reduction in payables.

 

Highlights:

1. After disposal of AAC (70-75 sen dividend to be distributed by 4Q2018), Airasia will become a NET CASH airline company (from 0.9x net gearing now, 10.2 billion net debt 2 years ago) as the cash proceed of AAC sale is RM4.2 billion and transfer of debts RM6.5billion (refer appendix 1 for sup. doc) to BBAM. Further dividend (about USD70 mil from Expedia AAE sales) is expected in 2019. There is another asset on sale is ACL (another 35 aircrafts) and may take some time to close deal (ACL’s price tag around USD300 mil).
2. Bear in mind after Airasia become a net cash company, its finance cost will be much lower and it got dividend policy of 20% which depend on their cash flow from operation to distribute normal dividend on top of special dividend.
3. Post disposal, the loss of AAC’s income is estimated at RM273 mil and higher lease expenses of RM130 mil (AAB portion), which will be offset by savings of RM110 mil finance costs and RM206 mil depreciations expenses for Airasia (refer to AllianceDBS report dated 1 Mar). The estimated net effect (income – saving) is a loss of about 87 mil income which can be compensated by higher revenue from aircraft fleet expansion and ancillary income (digitalization).
4. Even average jet fuel price was about USD83 in 1Q18, the cost per ASK (available seat kilometer) still maintain at relatively low level (13.55 sen) as per 1Q17 when jet fuel price at USD76. Airasia manage to achieve this low unit cost by constantly adding new aircraft (more available seat, higher utilization hours and high load factor of > 80%) and also reducing other related costs.  
5. Excluding one-off disposal gain from AAC & GTRH, the estimated profit from operation in FY2018 is about 1260 mil (EPS of 36 sen). With PE multiple valuation of 11x, Airasia’s fair value should worth RM3.96 per share. This is just solely based on current earning power from airline business without considering its digital venture businesses potential. Its sector average PE is at about 15x.
6. Last 15 years Airasia carried passenger and its aircraft fleet expansion have been growing at CAGR of more than 20% (refer to the chart at the last page). Its has gain more domestic market in Malaysia and Thailand with its aggressive ticket price (54% and 30% market share in Malaysia and Thailand).
7. One of its future growing airline markets is from China. China tourists like to have mobile pay and e-commerce experiences (online shopping like Taobao, Alipay and Wechat pay). Airasia has implemented its digitalization transformation plan which I think have great potential in long run (much lower capex in digitization venture compared to their airline businesses).
8. Due to Airasia has huge customer database (80mil+ passengers per year), it has launched multiple digital ventures from online duty-free retail (Ourshop) Big Royalty, to mobile e-Wallet (Big Pay) services to increase ancillary income. Digital transformation will provide future profit growth which Airasia has a big advantage to leverage on its existing big customer database which others digital company competitors need to spend million to billion to buy customers database (like giving offer or free vouchers to gain more users like 11street etc).
9. Digital ventures advantage is they are light asset (low capex required) and their biggest asset is their big customer database which they can use this database to increase their ancillary income.
10. Airasia planning for more rapid fleet expansion in 2018-2020, expected to end 2018 with about 225 aircraft (+29), around 270 aircraft in 2020 which provide continuous revenue and passenger growth.
11. The risk lies in surge in jet fuel oil price and USD appreciation which may affect its operation cost.

 

Worry about high jet fuel price effect on Airasia’s profit?

Many may think high fuel price (specifically is jet fuel) will affect Airasia’s profit. No doubt Airasia cost is correlated to jet fuel cost but I would like to show you that there is a way to mitigate the fuel cost by increasing the carried capacity (more aircrafts, more available seat, lower cost per unit). To understand airline operation cost, it is important to know what is Cost per ASK (Available Seat Kilometers). ASK of an airline refer to passenger carrying capacity or in other word is equal to the number of seats available multiplied by the number of or kilometers flown. Cost per ASK can give us of an airline Unit Cost (include jet fuel cost). Let us go through the cost per ASK for Airasia when it experienced high jet fuel cost in 1Q2018 as below:

Source: 1Q18 report

What I can notice from the table above is Cost / ASK (sen) dropped to 13.55 sen as compared to 13.61 YoY when Average Fuel Price (US / barrel) has increased from 76 to 83 (increased 9%)

How Airasia can maintain this low Cost / ASK while jet fuel cost is at high level of US83 per barrel? Airasia manage to maintain low Cost / ASK in 1Q18 is due to the following reasons:

1. Higher capacity (more new aircrafts --> higher available seat and fuel saving of A320) lead to higher passengers carried which can bring down the unit cost or cost / ASK.
2. Higher aircraft utilization (13.12 hours per day, highest over past 5 years) and route rationalization.
3. Stronger MYR in 1Q18 help to reduce the cost / ASK ex-fuel by 4%.
4. Lower other cost.

This exhibit high efficiency of Airasia in control their cost and at the same time increase their revenue which achieved an operation profit of RM640M in 1Q18 (refer to report of 1Q18). In addition, their net gearing has improved to 0.9x (net debt of 7.1 billion) from previously 1.11x (4Q17). Net cash inflow in the quarter amounted to RM170.5 million.

Airasia only hedged about 12% of its FY18F jet fuel needs at US$69/ barrel. The higher average jet fuel cost may pressure Airasia’s earnings but the impact maybe not so big in view of its efficiency in cost control (by higher aircraft utilization, higher passenger carried and load factor). Let see the June 2018 statistic of KLIA2 passengers as published by Airport Berhad Malaysia (Theedge news) as below:

Source: http://www.theedgemarkets.com/article/strong-load-factor-seen-aviation-industry

The traffic in May and June should be helped by General Election 14, Ramadan and Hari Raya Aidifiltri travelling where Airasia has increased their flights frequently during these periods.

Remember, Airasia still achieved relative good profit under Jet fuel price of USD83 in 1Q18 while MAS reduced 263 weekly flights and Malindo reduce 364 weekly flights (Domestic and Int). Source: Refer to page no 4 of the Airasia 1Q2018 result presentation slides.

How to do a stock Valuation?

For me, valuation of a stock is a combination of Math and art.  By using Math, one may calculate its PE, discounted cash flow, NTA (net tangible asset) etc to get a valuation. By using art, one needs to imagine the future growth (may due to expansion), future profit catalyst, future new products, future product selling price and cost. By combining these two valuation methods can lead to a more comprehensive quantitative and qualitative analysis.

Anyway, there is a lot of assumption need to be made for both methods of valuation. I normally feel comfortable with the assumptions and my investment decision may not solely depend on valuation. The assumptions could be wrong and can lead the wrong valuation sometime. Valuation is only good when you are plan to dispose the assets or for valuer to judge the NTA or book value. Personally I treat book value just as a guideline but not as the rule to follow. Practicing valuation is more for us to understand the margin of safety of our investment. 

3 types of value in a Stock

1. Current earning power value (PE)
2. Future Growth value (PEG)
3. Asset value (discount to book value or intrinsic value)

The question is how to translate your expectation of the company into numbers?

How do I value Airasia?

Method 1: By current earning power (PE)

Due to Airasia is in the mid of rationalization of its non-core assets (two assets already sold, AAC in the final stage of disposal), so PE valuation method is applicable to some of the Airasia non-core assets. Let see what are the Airasia's subsidiaries, Joint venture (including digital venture) and associate companies as below:

 

Price tag and enterprise value for each business of Airasia

AirAsia has sealed a deal to dispose its aircraft leasing operations (under AAC) to BBAM (namely Herondell, Incline B and FLY Leasing) for a total consideration of US$1,185M (RM4.536billion), inclusive of cash US$1,085m (RM4.2bn). The enterprise value (EV) of AAC operation is US$2,846.2m (RM11.1bn). The disposal of AAC includes existing 80 aircrafts, up-coming 4 new aircrafts and existing 14 aircraft engines.

Based on the EV valuation, AAC is valued at PE of 17x for FY17 (estimated US$68m profit contribution to AirAsia), substantially higher than AirAsia PE of about 10x (based on EPS of 30.7sen which excludes remeasurement gain on GTR and disposal gain, include these gain, PE is about 5x).

The interesting part of completion of AAC sales is Airasia group will become a net cash airline company, where transfer of debt of RM6.5 billion to BBAM and part of the proceeds will be used to repay its borrowings. The impact to sales of AAC includes loss of income and higher lease expenses of about RM403M, which can be offset by savings of RM110M finance costs and RM206M depreciations (depreciation goes to new owner BBAM) for Airasia.

From the table of enterprise value, the estimated profit of Airasia for FY2019 (after AAC sales and special div) is about 1.260 billion, which translated to EPS of 36 sen. With PE multiple valuation of 11x, Airasia should worth RM3.96 per share. This is just solely based on current earning power from airline business of Airasia without considering its digital venture businesses potential. Table below is a comparison for different budget airlines in the world (sector average PEx is 15x).

Source: Bloomberg and Airasia 1Q2018 result presentation slides

Method 2: By Future Growth value (PEG)

The price/earnings to growth ratio (PEG ratio) is a stock's price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time period. The PEG ratio is used to determine a stock's value while taking the company's future earnings growth into account and is considered to provide a more complete picture for a growing company.

The PEG ratio formula for a company is as follows:

PEG Ratio = Price-to-Earnings (PE) / Annual Earnings Per Share Growth

The is coming from the future growth potential of the company and the value is the collection of cash flow generated from the company in the future. However, the future is uncertain but huge potential.

Airasia Digital Transformation (BIG PAY, OURSHOP, Rokki etc using Big Data and AI Technology)

Most of the young generation lifestyle is digital-oriented. Before I talk about digital transformation of Airasia, let me show you some of the companies that running digital related businesses. Some of the big name of these companies including Alibaba (Alipay, 支付宝 is not listed under Alibaba), Tencent (Wechat pay), Amazon (Amazon pay, its platform), Grab (Grab pay), Paypal. Some of the local cashless payment solution providers in Bursa including Ghlsys and Revenue. Let see market valuation of these e-commerce and digital pay related companies.  

Source: Investing.com and Malaysiastockbiz.com

What I can observe the above companies (except GHL and Revenue) is they possess a big database of customer and they can sell products/services to them. As of the 2016 report, Amazon had 310 million active customers. In the most recently reported quarter, Tencent's WeChat had 963 million monthly active users. For Alibaba, its online shopping customers as of the third quarter of 2017 is 488 million active buyers who ever access its Taobao platform in the previous twelve months.  For Paypal, in the first quarter of 2018, there was 237 million customers active worldwide.

Findings:

1. If a company has a big database of customers and can generate good revenue from them (even not making much profit), then market is willing to give high valuation to them for its possible future growth. Their PEx can be range from 38 to 285.
2. For Bursa companies (GHLSYS and Revenue), they are mainly engaged in  the  local  distribution, deployment and maintenance of Electronic Data capture (EDC) terminals as well as provision of electronic transaction processing services (like payment gateway) for payments. They do not own big database of customer but they still have foreseeable growth and market also give them high PE valuation of 21-56x.

Let see how big the customer database of Airasia as table and figure below:

Source: Annual report of 2015, 2016, 2017

Source: Annual report of 2017

From the table, we can observe that Airasia has carried 65.5 mil passengers in 2017 and expected to carry 89 mil passengers in 2018.  Besides, their airasia.com website has 125 mil page views per month and 27 mil unique visitors per month. What I can forecast it their expected customer database in 2018 easily reach 89 mil and this figure may reach 100 mil in 2019-2020.

FYI, Airaisa current revenue via internet rate (mainly from ticket sales) is 70.4% (source from AR 2017). What Airasia want to do in in 2018-2020 is digitalization or digital venture that extend to or leverage on the same customer database to other businesses like logistic (via red cargo & red box), online duty-free retails marketplace (Ourshop, newly launched in July), mobile payment (BIG PAY), online remittance (BIG PAY, future project), Inflight Wifi (Rokki), Inflight food & beverage (Santan), online financing (provide loan, future project) and other related services.

All these services (especially online duty-free retail) can be helped by using the power of Big Data analytic. Big Data can help in analyze Airasia huge customer database (80M+ passengers) by predicting their future purchasing behavior which resulting higher sales (based on their search, travel destination or past purchase products records)

All these services can help in increasing Airasia Ancillary revenue which they have achieved about RM47 per pax in 1Q18 (including baggage fee). If exclude baggage fee, the ancillary revenue generated by these services is about 262mil in 1Q18 (10% of their 1Q revenue, 11% YoY improvement vs 1Q17).  I expect higher contribution from newly introduced online duty-free retail, mobile payment and online remittance services in 2018-2020 revenue.

Let me has a simple forecast on the possible future revenue from online duty-free retail (Ourshop) and mobile payment or e-Wallet (Big Pay) services as table below:

Passenger database size	*2018 – 89mil *(forecast)	*2019 – 95mil	*2020 – 105mil
Online duty-free retails marketplace (Ourshop)	Assume 2% of passengers spend RM100       -->  RM178 mil revenue	Assume 3% of passengers spend RM100       --> RM285 mil revenue	Assume 5% of passengers spend RM100 --> RM525 mil revenue
Mobile payment (Big Pay) – provide discount on retails, waive on bank/credit card transaction fee on ticket buying, collect BIG points to be used in other platform purchase (like Groupon)	Assume 1% of passengers using BIG PAY --> Gain 0.89 mil users and collected prepaid some amount of fund (Big Pay is a debit card), Improve Cashflow and future ticket & retail biz.	Assume 2% of passengers using BIG PAY     -->Gain 1.9 mil users and collected prepaid some amount of fund (Big Pay is a debit card), Improve Cashflow and future ticket & retail biz.	Assume 5% of passengers using BIG PAY --> Gain 5.25 mil users and collected prepaid some amount of fund (Big Pay is a debit card), Further Improve Cashflow and future ticket & retail biz.

By assuming 10% net profit margin from online duty-free retails and zero profit contribution from Big Pay (due to promotion to attract more customer) in 2018-2020, they will be about 525 mil revenues from and can increase Airasia revenue and net profit by about 5%. Remember, this is just from 1 digital service and there are a few promising services like e-remittance which can send money to their home countries for foreign workers in Malaysia. The advantage of e-remittance is it can reduce the agent transfer fee (money changers, banks) and the transaction can be done through mobile apps. Airasia customer database covers 21 countries (mostly in Asia) and a lot of the customers from middle class and low-income people that work in overseas.

The estimated EPS or profit growth rate for Airasia could be in the range of 10% in 2018 (capacity expansion, exclude one-off asset disposal profit), 12% in 2019 (capacity expansion, cost saving on new aircraft and digital biz contribution) and 15% in 2020 (cost saving using AI and IoT and digital biz contribution). Let assume 10-15% of growth rate in EPS in 2018-2020 to calculate Airasia PEG as table below:

	2018E* (*estimated)	2019E* (*estimated)	2020E* (*estimated)
PE	8.7 based on current price of 3.15	10	12
Growth	10%	12%	15%
EPS (exclude one-off gain on AAC n expedia disposal	39.6 sen	40.3 sen	41.4 sen
PEG	0.87	0.83	0.8

A rule of thumb is that any PEG ratio below 1.0 is considered to be a good value. Airasia current valuation still consider cheap based on its forward PE ratio and future growth rate. The PEG ratio of 0.83 for FY2018 indicates that it is still undervalue relative to its growth potential.

	2018E	2019E
PEx	10-11	11-12
EPS (exclude one-off disposal gain	39.5 sen	40.3 sen
Fair Price	RM3.95 -4.35	RM4.35 -4.8

Let see the last 15 year Airasia carried passenger and its aircraft fleet expansion (CAGR more than 20%) as per chart below.

Risk

1. Further depreciation of the MYR against the USD. A stronger USD will pressure Airasia’s profitability as a significant portion of its operating and financing costs are in USD.  
2. Surge in jet fuel price which may cause unit cost to ASK to rise on jet fuel (currently about USD85-88). Group CEO (Tony) said jet fuel price below USD100 is manageable for Airasia.
3. World crisis like war, terrorism and epidemic outbreak which affect tourism industry
4. High speed Railway project of Singapore and Malaysia (in long run of 6-7 years if the project is revived which is not likely to happen).

I may cover part 2 report of Airasia soon but some data may not for public. 

If you interested on my future analysis reports, please contact me at davidlimtsi3@gmail.com

Appendix 1 (other Appendices are Not for public)