My Name Is Bond, 'Bond Analyst'
These guys deserve a big bonus. As highlighted by Zentrader, there were early spotters of "something deficient" in Transmile even as far back as November 2005 by the people at Ratings Agency Malaysia. Kudos to the team.
Back in November 2005, analyst Wee Yee Tat, issued the report with the heading: "RAM reaffirms AA3/P1 ratings of Transmile Air Services’ RM150 million CP/MTN; rating outlook revised from stable to negative".
To highlight the crucial elements in his report:
a) The change in outlook is premised on the Company’s weaker balance sheet and debt-servicing ability due to its expansion plan and heightened business risks. As at 30 June 2005, the Company’s total debt and net gearing ratio stood at RM1,040.90 million and 2.17 times, respectively, compared to RM327.73 million and 0.52 times as at the end of FYE 31 December 2004. The additional borrowings have been utilised by the Company to fund the purchase of 4 new aircraft, i.e. MD-11s, in tandem with its plan to extend its intra-regional (or short-haul) air-cargo transportation services to the long-haul section.
b) Transmile’s gearing ratio is projected to remain high at about 1.0 throughout the tenure of the CP/MTN. The heavier debt burden has also somewhat weakened Transmile’s debt-servicing ability; its operating cashflow debt coverage ratio is now expected to average at 0.20 times compared to the previous minimum of 0.60 times.
c) Although RAM is cognisant of the tremendous business opportunities offered by the Asia-Pacific routes, it is also noted that competition is stiff. At this point, it is premature to conclude whether Transmile will be able to secure sufficient and sustainable loads for its new aircraft in order to generate returns from its investment.
d) RAM highlights that the MD-11s boast a capacity of 90 tonnes each, i.e. 4.5 times larger than the 20 tonnes of the Company’s intra-regional aircraft. Meanwhile, Transmile’s profit margins are seen to narrow following the capacity expansion as profit margins from long-haul routes are generally lower. e) Going forward, the Company’s operating profit before depreciation, interest and tax (“OPBDIT”) margin, which has historically ranged around 28% - 34%, is expected to come in at 25% - 30%.
Of course we have to highlight the big differences in the nature of the beasts (equity analysts vs bond analysts). The latter is primarily interested in the ability of the company to pay over the duration of the loan. It is hence concerned with cashflow, debt servicing, net margins and balance sheet integrity. Nonetheless, it would have been very easy to give an "easy review" on such a great growth story. What's incredible was that even with the "jacking up of false revenues", RAM still managed to drive at the important stuff and the indicators did not add up even with the "staging effects". Even with the "staging effects" by the culprits responsible inside Transmile, RAM concluded that Transmile would have had some difficulty in paying back the loan sum on time.
That's not all, RAM did a follow up review in August 2006, which was about the time Transmile became a favourite of international fund managers. This time Thong Mun Wai came out with a report with the heading: "RAM reaffirms AA3/P1 ratings of Transmile Air Services’ RM150 million CP/MTN, maintains negative rating outlook".
All said, it would have taken a lot of guts for the analyst and manager to stick to their guns on such a hot stock. The equity analysts would have found it near impossible to discover the "problem areas" if certain people inside were hell-bent on devising false figures to prop up profits. Nonetheless, RAM rises a few notches in my books. While the negative ratings were with regard to their ability to repay the loan in question, it still drove to the fact that RAM held tight to its strict guidelines in analysing companies, and did not waver in its principles.