Tomei Consolidated Bhd

I had been sending order to buy Tomei during the past few weeks. Finally, my transaction was done at 45 sen per share few days ago. So, here come the new member of my value stock portfolio.

According to its Mar-2009 report, Tomei's net working capital per share is about 77 sen. This means that my buy price is at a discount of about 40% from its net working capital.

Others supporting criteria for this investment:

• low PE ratio. (< 5, three years average)
• high dividend. (net DY about 7%, three years average)

One thing had to take note here, is that the current asset of Tomei is mostly made up of inventories. Though I'm not worried about this, some people may think that the value of its inventories is subject to impairment(loss) if their recoverable value fall, which is quite possible in the current (weak) economic condition.

Another thing about Tomei is that its debt ratio is a bit high as compared to my others value stocks. However, this new member of my value-stocks portfolio had a much better liquidity than those earlier picks, i.e. advpkg, sjc, yahorng, ...

Stocks sold from my "value portfolio"

In the pass few weeks, three stocks from my "value-stock-portfolio" had been sold. This article is a short review about these investments:

1. Advpkg

Bought 2000 unit at 55 sen on Mar-08, received dividend of 4.5 sen per share (tax-exempt) while holding, and sold them at 72 sen on May-09. The total return is about 35% for a holding period of about 14 months.

2. Lysaght

I bought 1200 unit at 85 sen in Sep-2008, sold 100 unit in Dec-08 at RM1. Then I received a dividend of 5 sen per share (tax-exempt). Sold the remaining holdings at 99 sen in May-09. Total return is about 17% in 8-months.

3. SJC

Bought 2000 unit at 53 sen in Sep-2008, never receive dividend, and sold them all at 72 sen in Jun-09. Total return is about 32% for a holding period of 9-months.

Reasons of selling:

The first reasons is their low liquidity (very low trading volume). Now, the market price of many others stock are cheap enough to meet my selecting criteria of "value-stocks", yet their trading volume provide better liquidity. So, I sold these 3 stocks in the hope that I can replace them with some higher liquidity value-stocks.

The second reason is the returns of these 3 stocks had met my minimum requirement (>20%, annualized). However, their fundamental still very good. So, if I can't find other value-stocks worth for investment, I may buy these stocks back later, provided that their price had fall back to a cheap level.

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AirAsia 2008 - Operational Cashflow still Strong.

Due to its weak performance in 2008, the shareholders of AirAsia had been worried about its gearing and coverage ratios.

This article is just a simple analysis on AirAsia's 2008 cashflow, which is an important measure of the company's ability in servicing its debts.

According to its audited account, AirAsia's cashflow from operation in 2008 is negative RM 416 million. This number, however, is what we get after charging the unwinding loss on derivatives. Seeing that the huge cash outflow of this unwinding process is not neccesarily to be recurring, we should exclude them from our analysis so that we can get a more accurate picture on AirAsia's real performance.

How much cash had AirAsia actually paid in the unwinding transactions? According to its report, the total unwinding loss incurred is RM 1.1 billion. The loss is allocated and borne by three entities of AirAsia:

• AirAsia Malaysia: RM 679 milion
• Thai AirAsia: RM 222 million
• Indonesia AirAsia: RM 207 million.

Among these losses, only the RM 679 million is reflected in AirAsia's income statement. I believe, however, that the cash outflow of RM 1.1 bllion is all paid from within AirAsia. This is because the two oversea entities have no enough cash to settle those transations -- their operation are still in loss position, and their equities are negative. And from the statements of AirAsia, we can see that more than RM 500 million of cash was injected into these entities by AirAsia in 2008.

Thus, instead of RM 679 milion, the total amount of RM 1.1 billion should be used for our adjustment on AirAsia's cashflow. After the first adjustment, the operational cashflow of AirAsia had become a positive RM 691 million.

Then, due to the reason discussed in my previous post (regarding the recurring nature of the fuel-hedging transactions), I'll charge back a cash outflow of RM136 million (equal to 20% of RM679 million) into AirAsia's cashflow account. After this second adjustment, AirAsia's operational cashflow of 2008 would be a positive RM 555 million.

* This figure is from the perspective of AirAsia company only. Because I can't get the information on the cashflows of TAA and IAA, analysis from the level of whole AirAsia Group can't be done.

Compared to the company's cash outflow on interest (RM 240 milion) and repayment of borrowing (RM 301 million), the operational cashflow can be considered as strong, and its cashflow ratios is within my comfort zone.

However, this cashflow performance is still below my initial expection. In 2009, I hope that AirAsia can make a huge improvement, generating an operational cashflow of no less than RM 1 billion.

Dissecting AirAsia's Earning 2008 (Part2)

Here, we examine AirAsia's financial performance, taking into account the profit/loss from Thailand AirAsia (TAA) and Indonesia AirAsia (IAA).

Revenues of the jointly-control-entity & associates in 2008:

• TAA: RM 889 million
• IAA: RM 482 million*

And their results are:

• TAA: RM -118 million
• IAA: RM -83 million*

* Besides IAA, AirAsia has a number of other associates. In the sense that their contribution should be quite small, I assumed that the figures of revenue/loss from associates as reported in AirAsia's statment are all derived from IAA.

The net losses stated above are after the adjustment discussed in part-1, i.e. I took out the whole unwinding loss on derivatives (RM 222 million for TAA, RM 207 million for IAA), and then charge back 20% of its amount .

The above losses are not reflected in AirAsia's reported income statement, because the associate's results are consolidated into AirAsia's statement using equity method, and their equity had become zero since few years ago. However, to gauge the economic performance of AirAsia as a grouop, these unregconized losses should be taken into account.

Consolidating the share of loss (48.9%) from these associates, AirAsia's results in 2008 will turn negative -- a net loss of RM 38 million. It should be pointed out that the shared profit/loss from the long-haul AirAsia X had not been included here. However, its contribution in 2008 should be quite small and hence negligible.

Next, we examine AirAsia's performance from the perspective of whole AirAsia Group. Here, we consolidate 100% of TAA & IAA's revenue and results with AirAsia Malaysia. In my opinion, this is the most appropriate measure of AirAsia Group's performance. (see the reasons here.)

The figures after consolidation are:

• Revenue: RM 4.00 billion
• Profit/loss: RM -141 million
• Profit margin: -3.5%

From the Group's perspective, AirAsia was suffering a loss in 2008. I'm a bit disappointed with this performance. However, the prospect of AirAsia in 2009 is very optimistic.

Dissecting AirAsia's Earnings 2008 (Part 1)

As pointed out in my older posts, AirAsia's reported earnings need some adjustment before the numbers can be used to gauge its performance.

To dissect AirAsia's 2008 earnings, let's begin with the reported numbers in its Income Statement:

• Profit before tax (PBT) : RM -869 million
• Profit after tax( PAT) : RM -497 million
• Earning per share: -21.1 sen

We start our analysis using PBT to eliminate the effect of deferred tax. First adjustment we had to do is taking out the non-operating gain/loss from the reported income. They are:

• unwinding derivatives (interest-rate swaps): RM -152 million
• unwinding derivatives (fuel hedging contract): RM -678 million
• foreign exchange movement on borrowings: RM -235 miilion

After our first adjustment, the profit of AirAsia in 2008 is RM196 million, which is equivalent to 8.2 sen per share. Not bad so far...

But I would like to discuss further about the validity of the adjustments done. Those 3 items are excluded because they are thought to be non-recurring in nature. But are they really so?

In my opinion, the FX movement is quite volatile and the trend is difficult to predict, thus its short-term movement can be considered as non-recurring. But fuel-hedging is a different case. Every airlines in the world will more or less hedge their fuel consumption. AirAsia's current position without any hedge is just a short term bet on the movement of oil prices. Sooner or later, it will resume oil-hedging activities.

So, the unwinding decission taken by AirAsia last year, is like charging all the future loss into one year. This action will make its 2008 earning worse, at the same time inflate its future reported income (less loss from hedging).

I suggest that we charge a portion of the unwinding loss back into AirAsia's income.

According to its quarterly report (Sep-2008), the original intention of AirAsia when entering these contracts is to hedge its fuel cost in the remaining period of 2008 and year 2009. Lacking of any detail information, I think the unwinding loss of these contracts (RM 678million) should be spread evenly over the five quarters starting Q4-2008. As a result, a loss of RM136million (= 20% x RM678million) should be charged into each of these quarters to bring down the inflated earning.

As a result, AirAsia's adjusted earning in 2008 will become RM 60 million, or 2.5 sen per share.

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