Thursday, February 25, 2010

Transmile - Catching Falling Knives & Accounting Lessons

Operating expenses per quarter RM70.9m (1Q2009), finance cost RM8.087m (1Q2009).
Operating expense per quarter RM36.8m (2Q2009), finance cost RM6.998m (2Q2009).

Operating expense per quarter RM39.5m (3Q2009), finance cost RM7.3m (3Q2009).

Operating expense per quarter RM263.6m (4Q2009), finance cost RM6.9m (4Q2009).

Naturally one can see that the 4Q operating expense was irregular. It would seem that the company has brought down normal operating expense to around RM35m per quarter. The additional losses were due to impairment losses in selling their assets.

Transmile said an impairment loss of RM8.2 million on its narrow body aircraft was recognised in operating expense in the current quarter to reflect the fair value based on published aircraft value as at January 4. An impairment loss of RM178 million on its wide body aircraft was also recognised to reflect the fair value less cost to sell.

Why the hoo-hah, why the sharp sell down in the shares? Don't people read company announcements? The planes were ALREADY reclassified during the quarter ended June 30, 2009, the company said in notes accompanying its 2Q2009 results.
“Following the decision of the board to dispose of the wide-body aircraft, the planes are now classified as assets held for sale in the current quarter,”

Transmile has some RM570 million in debts owed to term note holders and bondholders. Transmile’s outstanding debts comprise a US$66.9 million (RM235 million) syndicated term loan, US$65.6 million 1% guaranteed convertible bonds and RM105 million medium-term loans. In its 2008 annual report, Transmile notes that the four McDonnell Douglas planes (MD11s) were not classified as assets held for sale as it was “highly improbable” that the disposal could be completed within a year.

With the reclassification in 2Q2009, it is fair to assume that the company is optimistic of selling the planes now that the operating and credit environment is more favourable than in the previous year. The reclassification means that Transmile has convinced its auditors that it can find buyers for those planes in the near future. So, now the planes were sold and the impairment loss recognised, why jump up and down????

2009 4Q
Rev 46.6m Losses 212.9m Loss PS 78.9 sen NTA 8 sen
2009 3Q

Rev 30.5m
Losses 14.8m Loss PS 5.56 sen NTA 87 sen
2009 2Q

Rev 38.5m
Losses 0.227m Loss PS 0.17 sen NTA 93 sen
2009 1Q

Rev 35.5m
Losses 42.5m Loss PS 16.2 sen NTA 93 sen

Impairment losses basically says that what was reflected as assets or as NTA did not really match up when the assets were finally sold. As you can see from the NTA valuation progression over the last four quarters, it stood at 93 sen. If all the net assets that made up the 93 sen were sold into the market, technically you will get back 93 sen net cash. In fact, many companies are actually worth a lot more than their NTA, maybe they did not revalue some of their assets as frequent as necessary.

However, in this case, there are a few very troubling questions in my mind, and should be in many investors' as well:

a) Obviously, the 93 sen NTA was largely made up of the assets which were sold at a huge loss. Accounting standards should start requiring companies to reflect "impairment loss" accumulated as a charge on NTA to better reflect the real underlying NTA.
If you do not see the grave implications of NTA dropping from 93 sen to 87 sen and then to 8 sen all within 2 quarters of reporting, somebody needs to see a doctor.

b) This is very serious because many investors rely on the company's NTA in making a reference valuation point when deciding whether to buy a company's shares. If Pintaras Jaya has a NTA of RM3.00 and its trading at RM1.60, I know I have a lot of comfort level, .... because I can "rely" on the published and audited NTA figures. I can rely on the figures because its in the published financial statements, you cannot turn around and say
"caveat emptor mate", its just financial statements - you cannot say to me, "Bro (I hate that word), you shouldn't put all your eggs in the basket based on the NTA".

OMG MF, the NTA went from 93 sen to 8 sen in the blink of an eye. We only saw a very minute move down from 93 sen to 87 sen in the 3Q figures. Not all investors know that they should incorporate provisions for impairment losses when looking at NTA - there should really be more clarity in this matter.

c) One may argue that the NTA is but one of many indicators that investors should rely on. Am I barking too much over a small matter? Eeerrr NNNOOOOOOO ... because in cases like Transmile, where there was some crisis and the company is trying its best to find its footing, e.g. work out a reasonable business model and manage their debts ... most investors will RELY EXTENSIVELY on NTA as the benchmark because the likelihood of it being SOLD or WOUND UP is very high. Hence investors would look to seek out bargains or comfort levels based on the NTA.

That's the accounting lesson. Now for bottom pickers ...

a) The air cargo player now still serves over 20 routes in the region with its fleet of B727 and B737 planes. It has also retained DHL, TNT, FeDex and UPS as clients. By selling the planes, it goes some way to addressing their debt problem.

b) If you look at their revenue stream, its pushing to break RM40m a quarter convincingly and may get to RM50m soon. Looking at the cost side, taking out most of their finance cost, their operating expenses could be capped at RM40m a quarter but now you have "leasing charges" which could bring total expenses to RM45m a quarter.

Technically, if they keep improving a little bit more, Transmile could start making RM5m a quarter tax free (based on so much losses in the books) = RM20m a year. RM20m / 270m = 7.4 sen a share ... possible. Bottom fishing potential???

c) One should not look at their NTA anymore as the company has shifted from a an asset owner to a company that leases. Its no big deal as MAS and many other airlines have done the same. Its a different business model. The question is will Transmile survive??? Look at their current clientele, they still have DHL, TNT, FeDex and UPS ... WHY??? Why would these mega companies still do business with Transmile after the internal fiasco?

d) PN17 is a given and I do not see them not coming out of it. I do think some of the selling could be because investors fearing PN17 stocks cannot be margined, but seriously, who puts Transmile stocks under margin accounts.

Firstly, Robert Kuok is still there. Secondly, Robert Kuok is still there and rectifying and revamping the business model. Thirdly, Robert Kuok is still there and the clients know that Kuok has no part in the fiasco that caused the company's downfall. Fourthly, and most importantly, Transmile has very special landing rights in certain strategic locations.

I think the markets over-reacted on the sell side. I think Transmile is fairly value around 60 sen really (now 36.5 sen). They did NOTHING to deserve the sell down. The selling of planes was part of their restructuring plan. Now the business model looks more workable and I am more confident they can turn a profit by 2H2010.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

p/s photo: Ririn Dwi Ariyanti


Aaron Chang said...

I would like to hear your view on Puncak Niaga Bhd.


solomon said...

Would it be another case of privatisation at a lower price?

Marco said...

It is similar to Compugates case.