AirAsia X 2017 Q3 provision

AirAsia X released its 3rd quarter 2017 results and the following press release.

One snippet:


“The Company did well operationally in 3Q17. However, the third quarter financial performance was set back by the one-off provision for doubtful debt of RM50.2 million. It is a necessary action that has to be taken as we move on from past management’s business decisions.  With the observed booking trends, we are in line with expectations for a recovery in the 4Q17."


RM 50.2 Million is a lot of money, Air Asia X should give more details regarding this provision for the benefit of its shareholders. The AirAsia group loves to bring positive news to the media in a big way, but seems rather "hesitant" when the news is bad.

Also, blaming the past management is not exactly "elegant". Was the Board of Directors aware of the issue at hand? If yes, then they might also have to bare part of the brunt. If not, why were they not informed?

AirAsia X: late announcement from Tune Group?

I was looking at Bursa's website to check if AirAsia X had made an official statement regarding the UK corruption case of Rolls-Royce. There was no such announcement, hopefully they will release a comprehensive statement soon.

However, there was another announcement, Tune Group notifying its disposal of 147 Million shares of AirAsia X:

A major shareholder disposing a large chunk of shares, that seems like important news. Why did Tune Group wait almost one month to inform Bursa (and AirAsia X's shareholders) about this disposal?

AirAsia mentioned in Rolls-Royce bribery case (2)

The relevant documents on the website of the SFO (Serious Fraud Office from the UK) can be found in the following documents, the AirAsia case is referred to as "Count 12 - Malaysia Civil":

Deferred Prosecution Agreement – Statement of Facts – SFO v Rolls Royce PLC, paragraph 314 and further;

SFO -v- Rolls Royce judgment, paragraph 107 and further;

SFO -v- Rolls Royce Appendix A, paragraph 147 and further.

SFO -v- Rolls Royce Appendix B, detailing the financial sanction to be paid, in the AirAsia case being GBP 17 Million (RM 94 Million).

AirAsia mentioned in Rolls-Royce bribery case

Article from Malaysiakini (partially behind paywall), some snippets:


UK's Serious Fraud Office (SFO) has named AirAsia Group as one of several foreign parties involved in bribery cases with jet engine manufacturer Rolls-Royce PLC.

AirAsia Group, in an immediate response, told Malaysiakini that it had complied with procedures in its dealing with Rolls-Royce.

According to the Statement of Facts filed with the Crown Court at Southwark, Rolls-Royce failed to prevent its employees from providing an AirAsia Group executive with credits worth US$3.2 million (RM14.2 million) for the maintenance of a private jet.

This was despite Rolls-Royce employees believing that the credits would lead the AirAsia Group executive to perform his function "improperly".

"This financial advantage was given at the request of the AirAsia group executive, in return for showing favour towards Rolls-Royce in the purchase of products and services provided by Rolls-Royce and its subsidiaries, including Total Care Agreement services to be supplied to AirAsia X, a subsidiary of AirAsia Group," it said.

It also alleged that there was an attempt to conceal the fact that the credits, given to AirAsia X in 2013, would be used for the private jet, which was unrelated to the AirAsia Group.

On Oct 17, 2012, a Rolls-Royce employee reported to the Rolls-Royce senior employee that the AirAsia Group executive was seeking to "make the corporate jet deal 'invisible' with its 'value covered within additional A330 Total Care Agreement charges" for AirAsia X".

On March 15, 2013, a Rolls-Royce employee reported to his senior that the AirAsia X senior employee, who had been negotiating for the Air Asia Group executive's private jet, wanted a "cash settlement that is off the record and not visible to the AirAsia X group".

The Rolls-Royce employee raised concern that it was "unethical and likely illegal" and would rather not handle the case.

The Rolls-Royce employee complained that the AirAsia X senior employee had avoided discussing the private jet in front of other AirAsia X or Rolls-Royce employees and refused to communicate via email about the matter unless it was verbally or on Blackberry Messenger, a secured chat application.

In an interview during the SFO's investigation, the Rolls-Royce employee said the AirAsia X senior employee went as far as suggesting that the Corporate Care entry fee for the private jet be secretly spread across other AirAsia X payments to Rolls-Royce.

"Rolls-Royce employees believe the relevance of the jet to the issuing of those credits was most likely to be concealed from AirAsia X executives by the AirAsia X senior employee.


The above sounds very worrisome and requires an official, much more detailed answer from AirAsia than given.

I have written before about the huge amount of RPTs between the different companies in the AirAsia group and also the privately owned companies. This gives rise to numerous conflict of interest situations.

If the holding company was listed, with all subsidiaries (like AirAsia, AirAsia X and the subsidiary owning the private airplane) 100% owned, then many problems (like the above mentioning in the Rolls-Royce bribery case) would not have existed in the first place.

AirAsia pilot ends in Melbourne instead of KL

From the Guardian:

"AirAsia pilot ends up in Melbourne instead of Malaysia after navigation error".


An AirAsia flight from Sydney to Malaysia ended up in Melbourne instead when the pilot entered the wrong coordinates into the internal navigation system, an air safety investigation has found.

The Airbus A330 was scheduled to leave Sydney international airport at 11.55am on 10 March 2015, and arrive in Kuala Lumpur just under nine hours later.

Instead, through a combination of data entry errors, crew ignoring unexplained chimes from the computer system, and bad weather in Sydney, it landed in Melbourne just after 2pm.

Melbourne airport is 722km southwest of Sydney. Kuala Lumpur is 6,611km northwest.


More comments on this incident can be found here, a "rumour network for professional pilots".

The incident should not have happened, thanks to the simple invention of the checklist, as neatly described in the highly recommended book "The Checklist Manifesto" from Atul Gawande.

The author has a medical background and is quite "jealous" at the airline industry, where checklists are common for many decades and have reduced the chance for errors to almost zero, in contrast with the medical industry, where errors are still rather common.

Many relevant examples are given in the book. Interestingly enough, also regarding investing, the usage of checklists seems to have a good effect on finding suitable investment candidates, both in the Venture Capital industry (regarding high-tech start up companies) and in the more conventional value investing industry.

10 Largest Malaysian IPOs

Below is a list of the ten largest IPOs in the last ten years on Bursa Malaysia.


                              == Market Cap ==
Company          IPO date      IPO       Now     Change
Petronas Chem   26/11/2010    42,480    53,600     26%
Maxis           19/11/2009    40,650    44,836     10%
IHH             25/07/2012    24,891    54,855    120%
Felda           28/06/2012    19,335     5,363    -72%
Astro           19/10/2012    15,592    15,199     -3%
Bumi Armada     21/07/2011    12,124     4,165    -66%
Westports       18/10/2013     9,037    14,356     59%
Malakoff        15/05/2015     9,000     8,400     -7%
UMW O&G         01/11/2013     6,702     2,000    -70%
AirAsia X       10/07/2013     2,963     1,452    -51%


Some comments:

• 6 out of 10 companies are still below their IPO price, that is not impressive at all
• if one would put the same amount of money in each stock, then one would have a loss of 5%
• on average the companies IPO-ed about 3.5 years ago
• for international investors, the RM is down by about 20% versus the USD since 3.5 years ago, so the results are much worse
• the market cap off all 10 companies together has risen though, since their combined IPOs
• it is mostly IHH saving the day, with EPF continuing to buy IHH shares aggressively even at a rich PE of around 60
• Maxis, Astro, Bumi Armada and Malakoff are all "listed-delisted-relisted" cases, Bursa should really take decisive action to discourage this kind of financial engineering which comes at the expense of the minority shareholders, it is long overdue
• quite a few resource related companies on the list, they have not fared well lately

There was once a time when companies were listed at single digit PEs supported by profit guarantees, the valuation was set by the authorities. Needless to say, there was a lot of interest by investors, and some IPOs were oversubscribed by 100 times.

Those days are over, companies nowadays set their own price, which is of course correct. New, "sexy" terms were introduced by financial engineers, like "cornerstone investors", "greenshoe options" and "stabilising manager".

But from the above data, it seems the IPO price is often quite rich these days, and not much upside (if any) is provided in exchange for the risk that IPO investors take.

Combined with my previous posting about poor earnings growth for the Top 30 companies (not surprisingly there is quite some overlap), things don't look that impressive.

Bursa can hold as many international roadshows as they want, but at the end of the day, it is the fundamentals and valuations that count. And they really have to improve.

AirAsia X: is the rights issue enough? (4)

I wrote before about the upcoming rights issue of AirAsia X and asked the question if the money (RM 395 Million) is enough:


"The company has been bleeding lots of money (if one takes out one-off items and does not take deferred taxation into account, then AirAsia X lost money in every single year of its existence). Also, the company has large capital commitments."


AirAsia X announced its third quarterly results, and the loss for the year increased further to RM 562 Million, much larger than the recently completed rights issue.

On one side a large part of the losses (RM 357 Million) is due to foreign exchange losses, due to the weak Ringgit.

On the other hand, the company spend RM 371 Million less on fuel, due to the softening of the oil price.

Its shareholder equity is RM 503 Million, about equal to its deferred tax assets (RM 470 Million), which should (in my opinion) not be counted as an asset. In other words, without the deferred tax assets the shareholder equity would be very close to zero.

It looks like the company needs a huge injection of fresh capital, but another rights issue, so soon after its previous one, might be hard to digest for the minority shareholders.

Tony's Top Ten Tips

I have often been critical about AirAsia (and even more so regarding AirAsia X) in this blog, especially regarding the aggressive accounting and the convoluted corporate structure.

But I did like the entrepreneurial spirit and "can do" attitude of Tony Fernandez and his staff.

Tony was invited to speak at an event organised by Digital News Asia and didn't disappoint with his speech "What’s Next: Tony’s Top 10 Tips for Entrepreneurs".

I think they are great tips, so I will copy them here from the above link:


1) You don’t need to know everything
 
I came from the music business. I knew nothing about planes. To all the entrepreneurs out there, you don’t need to know everything about what you want to do. It’s all about the idea, it’s about passion, it’s about implementing it.
 
2) Just do it!
 
Don’t let anyone tell you that you can’t do it. You’ve got one life, so you can’t press the rewind button and say ‘I wished I had done that.’

So I recommend to all of you out there, just do it. Live your life to the utmost, be positive. If you fail, at least you have tried.
 
I have failed miserably at Formula One, but I have no regrets because I got to stand with the greats from Ferrari, McLaren, and others.
 
3) Passion is a key problem-solver
 
Dreams do come true. Don’t worry about failure. You have one life, make the most out of it. Nine times out of 10, if you have the passion, you will find a way to work through it.
 
4) Invest in marketing
 
If you have the greatest idea in the world, please, please, please put some money on marketing. This is because if you don’t put money on marketing, nobody is going to hear about your great idea.
 
There are so many great ideas that never took off because of a lack of marketing.
 
Marketing is not about the dollars, it is also about public relations (PR). In AirAsia, we had no money. So I ran around with a red cap on and said controversial things so that the press would always take a picture of me. That was our marketing in AirAsia’s early days.
 
We have been through so many issues, and marketing played a key role in overcoming them.
 
Remember SARS (severe acute respiratory syndrome)? At that time, nobody wanted to fly; we all thought we are going to die.
 
Everyone cut their advertising, but I told my guys not to cut because this was the best time to build our brand. In fact, we tripled our advertising and everyone looked at me and said, “Are you on drugs?” I said, no, it is the best time because no one else is advertising.
 
When the first Bali bomb attack happened, everyone cancelled their flights. I said to the guys, we cannot let the Bali route die. We must continue to fly.
 
So we came up with ‘Love Bali’ campaign, giving away 10,000 free seats, and it worked. All 10,000 seats were snapped up in like under one minute. And all those who got those seats told all their friends about it on social media. Your best advertisement is your customers.
 
5) Leverage social media
 
When Malaysians get a good deal, they will tell the whole world about it. So the 10,000 people who went and had a good time in Bali, told 10,000 people that they had a good time. That was the early gestation of AirAsia’s social media.
 
We realised the power of social media very early on, so when Facebook and Twitter came up, we latched onto them. We were early adopters. We now have 32 million people on our various social media platforms, and 7% of our business comes directly from social media.
 
The Bali campaign taught us that our best advertisements are our customers.
 
6) Don’t be scared of complaints
 
Complaints are actually free market research. Someone took the effort to write to you to tell you where things went wrong and how they should be improved. These are things that companies pay a lot of money for consultants to tell them that same thing.
 
So we treat every email preciously.
 
7) Focus on one image when it comes to branding
 
During the early days, there was the word ‘AirAsia’ and a logo of a bird in our branding.
 
If you look at the top brands in the world, there’s only one image that comes to your mind. When I say “Shell,” you think of the Shell logo. When I say “Coca-Cola,” you think of the word ‘Coke’ in italics, and when I say “Nike,” you think of the swoosh.
 
So, back to our earlier AirAsia brand, we said drop the bird – we felt it was facing the wrong way anyway – and we used ‘AirAsia’ as our logo. Just one image. Why spend double the money to promote two images?
 
We also dropped the blue and the green colours. I tried very hard not to go with red, because everyone thinks that I want to be Richard Branson [the Virgin Group founder and Fernandes’ former boss] ... but it was the best colour, so we picked red.
 
So yes, the colour does make a big difference!
 
8) Go on the ground
 
What I used to do – although I don’t do this anymore – was that once a month, I would carry bags, I would be a cabin crew [member], and also at the check-in counter.
 
 I did this for two reasons: The first is that you can’t be an effective CEO (chief executive officer) unless you go on the ground to experience the real situation.
 
Here’s a true story. The baggage handling team told me that they needed belt loaders. I told them, “No, we can’t buy that as it’s too expensive.”

So one day when I was tasked to carry bags, they put me on one of the Indonesia flights. People who fly with us generally bring their house with them, but people who fly to Indonesia bring their neighbour’s house as well!
 
So there was a lot of bags. I broke my back in the process, and I told my team that they were right and I was wrong, and let’s buy the belt loaders.
 
If I didn’t do that [go on the ground] and just sat comfortably in the office, I would have made a wrong decision, damaged a lot of bags, and probably started a union.
 
The second reason [for going on the ground] is that I wanted to look for talent. I wasn’t looking for the talents from Oxford or Cambridge, I was looking for the Grade 3 SPM [O Levels equivalent] kind of guys who needed a second chance.
 
9) Never underestimate the potential of your staff
 
I broke all the rules in terms of hiring people. To me, as long as you have a dream, you can do anything.
 
There was an ex-cabin crew member – she came up to me one day and told me that her dream was to become a pilot. I told her to go for it.
 
Then she called me up one day and asked if she could take part in the Miss Thailand [beauty pageant], and I told her okay, as long as I get to use her photographs in our marketing materials.
 
She won the [Miss Universe Thailand] pageant and recently became a captain – so we are the only airline in the world with a Miss Thailand flying with us.
 
The moral of the story is that we have such a flat structure that she was able to tell me what her dreams were, and we were able to make a raw diamond into a diamond.
 
Another one of my boys, a baggage handler in Kuching, told me he wanted to become a pilot. I told him to go for it. He passed all the exams ... he had the top marks in the flying academy. Today, he is a captain.
 
We have many of such stories at AirAsia.
 
Your biggest assets, besides your ideas, are your people – because at the end of the day, it is the people who will deliver your ideas.
 
10) Data is king
 
We have a huge amount of data that we don’t know what to do with it, but everyone else wants our data ... so we figured it must be something very valuable and there must be an opportunity there.
 
We are investing in a few ventures. We plan to launch our own version of TripAdvisor, a travel dongle, a new YouTube-type of channel and more – data will be playing an essential role in these ventures. Data will be king.


Where is Ze Moola (the excellent, but inactive blog) often complained about the articles written about AirAsia. I guess Tony spilled the beans how those articles were conceived:

"Marketing is not about the dollars, it is also about public relations (PR). In AirAsia, we had no money. So I ran around with a red cap on and said controversial things so that the press would always take a picture of me. That was our marketing in AirAsia’s early days."

Journalists probably should have taken some distance there, but might have fallen too easily for the juicy story.

GrabTaxi worth more than AirAsia? (2)

I wrote about this issue before.

Since then GrabTaxi (EasyTaxi in Malaysia) raised another round of USD 350 million. I estimate at a valuation of about USD 2 billion, or about RM 9 billion.

AirAsia has a marketcap of about RM 3.6 billion, AirAsiaX of about RM 800 million, so together these two companies are valued at about half the valuation of a four year old company, which is basically an apps.

I don't make any value judgement here, just observe something that sounds interesting and may be controversial.

Apparently Tony Fernandes also noticed the high valuation of GrabTaxi and some other "unicorns" (start-up companies valued at above USD 1 Billion). At a recent event, he mentioned:


“Essentially, we are an Internet company. We see ourselves as an Internet company. We have a tremendous amount of Internet potential,” he told the audience at Digital News Asia’s inaugural What's Next conference in Cyberjaya yesterday (Sept 29).
 
“More than 20% of our business comes from ancillary income,” he said.
 
 The AirAsia Group has invested in or kicked off several ventures, such as AAE Travel (a joint-venture between AirAsia and Expedia); the Asian Aviation Centre of Excellence; Think Big Digital (a joint-venture between AirAsia and Tune Money which operates the AirAsia BIG loyalty programme); and it also has a 40% stake in Tune Money.
 
 These are not Fernandes’ only ventures. He also owns the Tune Group which has investments in Tune Talk, Tune Hotels, Tune Protect, Tune Studios, Tune Labs (a venture company looking at tech startups), and more.
 
Unsurprisingly, the Internet plays an essential part in most, if not all, of these businesses. Indeed, many industry pundits have credited Tony and AirAsia for breaking down e-commerce barriers in Malaysia.


 Does that mean that Tony wants an internet valuation for his company, not an airline valuation? If so, will he get that?

Time will tell.

AirAsia X: when it rains, it pours

AirAsia X has been in the limelight recently due to its poor results.

The company announced today another negative surprise:


The Board of Directors (“the Board”) of AirAsia X Berhad (“the Company”) wishes to disclose that its internal and external auditors have recently discovered that certain payments have been made to a service provider between the period of 2010 to 2014 for services which are now established to be fictitious.

Following the discovery of the irregularities, the Board has on the recommendation of the Audit Committee appointed PwCCS to carry out a forensics audit and instructed the Management to ensure the availability of all relevant documents and/or key personnel for PwCCS review and interview, where applicable.

In the course of the forensics audit, PwCCS discovered 24 payments have been made to a service provider amounting to RM7.01 million for fictitious services. The payments were authorised by a person in a management position within the Company.


This fraud came at a very unfortunate moment for the company, in the first half of this year the company lost a whopping RM 259 Million. The fraud will further lead to less confidence, and will draw away much needed focus from the management team.

The share is trading at RM 0.16, below its recent rights issue, and very much below its IPO price.

AirAsia X lodges complaint with SC

According to this article in The Star, AirAsia X has lodged a complaint against GMT Research with the Securities Commission.

First of all, I have to admit that I haven't read the original article by GMT Research (I have read though the freely available articles).

Secondly, filing a complaint with the SC is not akin to suing a company, everybody can file a complaint with either SC or BM.

The article is not very specific about the reasons behind the complaint, only one item is mentioned:


“GMT has accused AAX, among others, of practising or allowing profit shifting between AirAsia Bhd (AAB) and AAX by way of transfer pricing of the service fees and costs charged by AAB,” it said.


A reference is made to article 177 of the CMSA:

In other words, even if what GMT wrote was not correct (I am not sure about that, no concrete example with supporting evidence is given), then still it must be proven that either GMT didn't care that the information was wrong, or that they knew that the information was wrong. Looks to me rather difficult to prove.

For two more links from GMT Research about AirAsia: here and here.

AirAsia and AirAsia X are probably the most hyped companies listed on Bursa, the public is bombarded by PR campaigns on a weekly (sometimes daily) basis. Many times "rumours" are picked up by the media, which are then denied a few days later. Twice (free) PR, all very much in the Richard Branson style.

Both AirAsia and AirAsia X have however hugely disappointed in the last few years, despite using very aggressive accounting techniques.

Naturally, that combination will attract critical comments, may be not so much in Malaysia, where the mainstream media seems rather cosy with AirAsia (AirAsia is of course a large advertiser) but more so outside.

It is (at least for me) disappointing when one of the most hyped companies, having one of the worst post IPO performances, can't stand some critical comments.

Especially given the recent events in Malaysia, where "shooting the messenger" is (as always) very widespread.

GMT on AirAsia: "New Dog, Old Tricks"

On Vimeo a video is released giving some (but not all) of the issues that GMT Research has raised on AirAsia.

The video can be found here.

It is reasonably detailed and I recommend the viewer to pause the image when numbers are being shown.

Tony Fernandes has immediately described the report as "rubbish", and that he will proof the writers of the report wrong. Not an unexpected reaction.

However, what is needed is a more sophisticated reaction, not the kind of reaction from Nobel (listed in Singapore).

Airasia has announced a pretty decent reply a few days ago, however, there are some shortcomings.

First of all it prides it self on transparency, but good transparency is something else than good governance or good accounting.

For good governance for instance a neat corporate structure is needed, something AirAsia (and its mother company) doesn't have. The amount of related party transaction between the many parties (each with different shareholders) is simply overwhelming.

Regarding the good accounting: AirAsia has always accounted very aggressively, in my opinion much too aggressively, and in AirAsia X's case to an extent that is doesn't make sense at all (deferred tax when it continues to make losses).

Regarding the first part (the consolidation has just not been possible), surely it could have been presented in some form or shape in the year report, what the consequences would be of consolidating.

Good however that from the second quarter onwards the company will include the numbers.

For me, AirAsia has always relied much too much on a combination of financial engineering and marketing hyphe, something I don't like at all.

This report by GMT is a refreshing, different approach from the usual stuff we normally read in the Malaysian media.

Who will be right at the end of the day? I guess we have to wait and see.

AirAsia is however warned, and could thus take appropriate actions, for instance by raising more capital.

Another unrelated but interesting video by GMT can be found here, some of its contents:

• WorldCom & Enron explained
• Goodwill & impairments
• CP ALL: A very over-leveraged buyout
• Youku: Growth through acquisitions
• Curious Assets
• Wilmar: Leveraged Chinese carry trade
• Reliance Infrastructure: Capitalising expenses?
• Chinese Concessionaires: Paper profits
• P&G H&H: Corporate governance
• Larsen & Toubro: Cutting off the lifeline

AirAsia drops 10%, due to research report?

The share price of AirAsia dropped yesterday about 10%, back to its 2010 levels. According to The Star's article:


".... on concerns about the outbreak of the Middle East Respiratory Syndrome (MERS) and its impact on air travel but greater concerns could be about the weak ringgit.

AirAsia could also be hit by the depreciating ringgit as sizeable fixed costs are in US dollar while bulk of earnings are in ringgit, analysts said."


I received news from a reliable source that a research report from Gillem Tulloch of GMT research might (also) have to do with it.

I don't have the report, nor is it publicly available (behind paywall).

According to one broker (edited):


"The issue raised include the ability of Indonesia AirAsia (IAA) and AirAsia Philippines (AAP) to repay their debts of RM 2.8 Billion.

Tony strongly believes he can get back around one billion ringgit after he locks in new investors in both IAA and AAP. Within the next three months. The process is further ahead in the Philippines than in Indonesia. But until we see the one billion ringgit, there will always be concerns and risks that the deal could fall apart. All I have right now is Tony's word that things are progressing well.

... the longer-term issue is, whether AirAsia will be able to get IAA and AAP to be sustainably profitable.

With foreign shareholding >50%, it's vulnerable to a massive sell off. ".


The accounting issues are not new, I wrote for instance almost four years about the same (here).

We will see how this will pan out, when more details about the research report will be published, and AirAsia will react to that.

Hopefully in a more professional way than the previous time (here and here):

It looks like Paul Dewberry was right after all and Tony Fernandes could not prove him wrong.

To end this posting on a positive note, the board of directors of AirAsia X has suspended their wages for 2015, which is a great gesture. I hope other Bursa listed companies follow suit, when the need arises.

AirAsia X: is the rights issue enough? (3)

I wrote before:


".... its 2014 loss is 1.3 times the amount the company wants to raise through its rights issue. The obvious question would be: how long will the rights issue last? The company still has not shown a single year of profit (corrected for one-off items and deferred tax)."

AirAsia X announced today another large quarterly loss, RM 126 Million this time.

The company will soon receive the much needed RM 391 Million cash from it's rights issue.

But how long will that last?

After taking out the deferred tax assets (which I think it never should have counted in the first place), the company lost RM 1.07 Billion over its life time.

And then, there are capital commitments running in the tens of Billions:

How is this going to end?

Weekly roundup

Regarding Cliq: The Edge wrote an article "Potential adjustment to price of Cliq’s QA". Some snippets and comments:


Ahmad Ziyad said that if a disparity between the oil price and the purchase price still exits in March, the assets’ price tag may be adjusted by 5% of the current amount, or no less than US$218.5 million.


Five percent adjustment is not that much, the impact of the lower oil price on the price should be much higher, in my opinion.


When asked why Phystech was willing to sell its assets, Ahmad Ziyad said: “They think that all this while they have not realised the full potential of the field.”


That is not what I hoped to read, better something like: "there is enormous potential, but the company has not enough funds to explore, so Cliq will purchase new shares in the new SPV with which new exploration wells will be drilled, old machinery will be replaced by new, efficient ones".


I have been very critical of SPACs from the start, I am afraid I have not yet seen any reason to change my mind in this matter.


MSWG wrote in their newsletter of March 27, 2015:

That is indeed good news. However, I like to note that Amin is a large shareholder of Integrax. For small shareholder (in the absence of large shareholders fighting to get a better deal) there should also be enough venues to participate in shareholders activism. In some countries I have noted class action suits, taken up by an organisation similar to MSWG, with large amounts of minority investors chipping in. That scenario still appears far away in the Malaysian context.


Kinibiz wrote: "At SP Setia, a conflicted ex-chief judge", a snippet:


Can the chairman of a public-listed company rightly hold shares in another public-listed company — a direct rival at that?

Common sense says no. In fact the law also says this should not be. But this scenario is exactly what has unfolded with regards to SP Setia chairman Zaki Azmi.

Zaki, a former chief justice, holds 19.12 million shares in Eco World Development Group as of Jan 22, according to the latter’s latest annual report. On that date this corresponded to 3.77% of Eco World’s outstanding shares base, making him the third largest shareholder, and was worth RM37.2 million at Friday’s closing price of RM1.95 per share.

And it was not just Zaki. Eco World’s latest annual report also reveals that SP Setia’s two foremost management executive — acting CEO Khor Chap Jen and acting COO Wong Tuck Wai — holding 2.29 million and 1.53 million shares respectively as of Jan 22 this year. The shareholdings come to 0.45% and 0.3% respectively of the outstanding shares base at that point.

This raises pressing questions of conflict. Foremost is why Zaki and company are apparently turning their backs on the obligation for company directors to actively avoid positions of conflicting interests under Section 132 of the Companies Act, which stipulates that directors must use “reasonable diligence” in the discharge of his duties.

Worse, this rubs salt onto SP Setia’s festering wounds after a massive talent drain to Eco World, which is now counting a legion of former SP Setia men — all the way up to the top — as among its directors, top executives and most of its workforce.


It is indeed rather strange and worrisome, the investments in Eco World of the persons mentioned above are substantial. Will that have an impact in their acting in the best interest of SP Setia?

AirAsia X: is the rights issue enough? (2)

I wrote before about the coming rights issue of AirAsia X to raise RM 395 Million in much needed cash.

AirAsia X announced its fourth quarterly results, they were not exactly pretty: another loss of RM 168M, bringing the total for the year to RM 519M.

In other words, its 2014 loss is 1.3 times the amount the company wants to raise through its rights issue. The obvious question would be: how long will the rights issue last? The company still has not shown a single year of profit (corrected for one-off items and deferred tax).

From a Reuters article:


Analysts said shoring up the balance sheet has now become a priority for AirAsia X.

"Their capital base is really thin right now," said Maybank analyst Mohshin Aziz. "Among all the airlines in Asia Pacific, their balance sheet is the most precarious. They need to execute their rights issue as soon as possible."

AirAsia X: is the rights issue enough?

There were many rumours going around regarding AirAsia X, quite a few of them were proven right, as so often in Malaysia.

The company (belatedly, only on January 30, 2015) responded on some of them:


"With regards to the press reports in the NST dated 28 January 2015, AAX can confirm Azran Bin Osman Rani’s cessation from the Chief Executive Officer office with effect from 30 January 2015.

The Board of Directors of AAX has appointed Datuk Kamarudin Bin Meranun (“Datuk Kamarudin”) as the Group Chief Executive Officer for AAX and Benyamin Bin Ismail (“Benyamin”) as the Acting Chief Executive Officer of the Company with immediate effect.

As to the speculation on the resignation of the Chief Financial Officer, there is no truth to this.

Datuk Kamarudin and Benyamin will spearhead with the reorganisational and turnaround exercise for the Company and to strengthen the Company’s balance sheet and to maximise profitability in ensuring the Company will be in a better financial footing."


The company also announced a rights issue to raise RM 395 Million, money that is indeed very much needed. The question is if the money is enough. The company has been bleeding lots of money (if one takes out one-off items and does not take deferred taxation into account, then AirAsia X lost money in every single year of its existence). Also, the company has large capital commitments.

Next to that, there has been a lot of selling through insider trades after the IPO, not adding to the confidence.

I think it would have been much better if all the money raised at the IPO would have been injected into the company, and shares owned by insiders would have locked up for say two years after the IPO. The authorities should consider this for future IPO's of companies, especially those that have not yet proven their business model.

With 20/20 hindsight we are all experts, but it must be noted that there were enough critical comments before AirAsia X's IPO.

"Serious Investing" wrote an interesting article here with an update here.

I wrote here on the IPO, some snippets:


"AirAsia X is offering 790 million shares, rumoured to be priced around RM 1 per share. Almost 200 million of these shares are from existing shareholders, which seems strange, AirAsia X's balance sheet is weak and this company needs money, lots of it, so why not just issue new shares?"


The exact amount paid to its existing shareholders in June 2013 would be RM 246 Million (197M shares at RM 1.25), money that would indeed have been very helpful for the company. With that money the company might not have needed a rights issue.

I also wrote about valuation:


"A company in this state, urgently needing money should not strive for a sky-high valuation. The total number of shares currently is close to 1.8 Billion, in other word pre-IPO the company is valued at about RM 1.8 Billion. Shareholders equity is 518m, which includes 247m deferred tax assets. The offer therefore looks very stretched, both from an earnings point of view (operational losses, even after six years) and a balance sheet point of view (excl. deferred tax assets).

It must also be noted that Virgin Group (Richard Branson) invested in AirAsia X in 2007, but did not participate in the subsequent rights issue in 2010, according to The Edge. Also, he sold his 10% of the company allegedly for more than USD 21M, valuing the whole company at more than RM 650m.

AirAsia had an option to increase its current shareholding in AirAsia X, but strangely enough it decided not to execute that option. Its shareholding of AirAsia X will therefore drop to only 12%, hardly meaningful and below the 20% needed to call AirAsia X its associate."


In a later post I wrote:


AirAsia X managed to book a profit over 2012, but only with the help of deferred tax accounting and gains on foreign exchange, without these 2012 would also have been a loss (like all previous years). To me, it completely hasn't proven its business model on the long haul flights.

Since the results of AirAsia X were not exactly rosy, the company also published its EBITDA numbers (Earnings Before Interest, Tax, Depreciation and Appreciation), showing profits every year.

Charles Munger has a very clear opinion about EBITDA:

"Every time you see the word EBITDA in a presentation, you should replace it with BULLSHIT EARNINGS, because that's what they are!"


Given the results of AirAsia X since the IPO, it appears that Charles Munger is indeed right about EBITDA.

AirAsia X's share price since its IPO:

AirAsia X facing turbulence? (2)

AirAsia X announced its results, they were rather bad, a loss over the quarter of RM 211 Million for the quarter.

Shareholders' equity has decreased to RM 865 Million. However, that is including RM 414 Million of deferred tax assets, without that the shareholders' equity would only be RM 451 Million.

Its retained losses are RM 341 Million, but again including the deferred tax assets, without those it would be RM 755 Million.

The above makes the article in The Edge more likely to be true, at least partially. One snippet:


"The circular stated that basic salary, fixed allowance, productivity allowance and overtime would be paid on Oct 24, while variable allowances such as flying allowance, sector allowance, night stop allowance and commission would be paid on Oct 31. Posting allowances for charter flights will be paid on Nov 5. Describing the unprecedented payment issue as a “temporary setback”, the management of AirAsia X blamed the payment delay to the “late arrival of incoming funds”."


Is the above information as defined in the category "material information"?

If there are two companies, A and B, in all aspects exactly the same, but company A delays paying its employees, and company B does not have those issues. Would there be a difference in the price investors are prepared to pay for company A versus company B?

I think there is. Which means that the information is indeed "material information".

According to the "Corporate Disclosure Guide" from Bursa:

The share price of AirAsia X has indeed performed badly in the last ten days, declining from RM 0.80 to RM 0.645, or 19%.

When was the above information regarding the financial problems available? The Edge doesn't write it, but it does write "would be paid on Oct 24", indicating that the circular most likely was distributed before October 24th.

And thus, as far as I can see, AirAsia X might not immediately have disclosed material information.

CG Watch 2014, which I rate highly, rates Corporate Governance in AirAsia X in the top half of its list of Malaysian companies. I am afraid I can't agree with them on that point.

AirAsia X facing turbulence?

Two articles about AirAsia X from The Straits Times respectively The Edge Markets:

• "AirAsia X facing trouble paying staff salaries"
• "AirAsia X flies into greater turbulence"

I wrote exactly two years ago a highly critical article "AirAsia X: IPO poses many questions", some snippets:

• AirAsia X is offering 790 million shares, rumoured to be priced around RM 1 per share. Almost 200 million of these shares are from existing shareholders, which seems strange, AirAsia X's balance sheet is weak and this company needs money, lots of it, so why not just issue new shares?
• I have blogged before about the huge amount of Related Party Transactions (RPTs) between AirAsia and AirAsia X...... From a CG point of view, this is (highly) undesirable.
• This huge amount of deferred tax assets was just enough to claim retained earnings of 35m. Still a very low amount, given the fact that 480m has been invested in the company over a six year period. Quite amazing that a company with such a poor track record would be allowed to be listed on Bursa Malaysia.
• A company in this state, urgently needing money should not strive for a sky-high valuation. The total number of shares currently is close to 1.8 Billion, in other word pre-IPO the company is valued at about RM 1.8 Billion. Shareholders equity is 518m, which includes 247m deferred tax assets. The offer therefore looks very stretched, both from an earnings point of view (operational losses, even after six years) and a balance sheet point of view (excl. deferred tax assets).

There were warning signals, for instance:

• It must also be noted that Virgin Group (Richard Branson) invested in AirAsia X in 2007, but did not participate in the subsequent rights issue in 2010, according to The Edge. Also, he sold his 10% of the company alledegledly for more than USD 21M, valuing the whole company at more than RM 650m.
• AirAsia had an option to increase its current shareholding in AirAsia X, but strangely enough it decided not to execute that option. Its shareholding of AirAsia X will therefore drop to only 12%, hardly meaningful and below the 20% needed to call AirAsia X its associate.
• Not only did the insiders sell shares at the IPO, they sold even more shares after the IPO.

The graph of the share price looks rather ugly:

Virgin Galactic: the warnings

Good article in The Telegraph about the tragic event where one pilot died. With hindsight we are all experts, but there where many people who warned before the incident happened, the only warnings that count. Some snippets from the above article:


Sir Richard Branson's space tourism company Virgin Galactic has been accused of ignoring a series of warnings that its $500 million rocket was unsafe for flight.

A number of senior aerospace engineers repeatedly voiced fears over the design of Sir Richard’s SpaceShipTwo and the safety protocols surrounding its testing.

The Telegraph has seen emails and other documents in the public domain — dating back several years, and as recently as last year — in which the engineers warned of the dangers of Virgin Galactic’s rocket engine system.

It also emerged on Saturday that three senior Virgin Galactic executives — the vice-president in charge of propulsion, the vice-president in charge of safety, and the chief aerodynamics engineer — had all quit the company in recent months.

The Virgin Galactic spacecraft, which was scheduled to begin passenger flights early next year, blew up in the sky above the Mojave Desert in California during a test flight on Friday.

The incident, in which one pilot died and another was seriously injured, puts in jeopardy Sir Richard’s dream of space travel for passengers, each paying $250,000 (£156,000).


One of the people who was highly critical of Virgin Galactic's enterprise is Tom Bower who wrote "Branson: Behind the Mask", about which I wrote here.

The book is an excellent "antidote" for all the hype and PR exercises that surround Branson.

The first chapter "Blow-Out", the last chapter "Journey into Space - Postponed" and many chapters in between are dedicated to the technical problems and delays surrounding Virgin Galactic.

Unfortunately (in the Malaysian context), not one word about Branson's investment (and subsequent divestment) in AirAsia X.