Wednesday 26 February 2014

A Tribute to Wan Abdullah

This is a tribute to my friend, Dato’ Wan Abdullah Wan Ibrahim, the former Chief Executive Officer and Managing Director of UEM Sunrise Bhd who passed away on February 26, 2014.

I got to know Wan since end of 2010 when UEM Land Holdings Bhd acquired Sunrise Bhd and I subsequently joined the board of UEM Land. I am not his close or family friend, nor am I his golfing buddy. I am sure many of his friends can write far better tributes to a man who was genuinely warm, fair, honest, humble and hard-working.

There is one very positive aspect of Wan that I know well, and I feel it will be a loss if I do not share. He is genuinely inclusive and not egocentric. This is a trait not often found in corporate Malaysia.

Post-acquisition of Sunrise Bhd, Wan warmly embraced the staff, the processes and the values of Sunrise into the enlarged entity. So much so that UEM Land Holdings Bhd is now renamed UEM Sunrise Bhd. Of course, this is also made possible by a majority of the board members who are equally inclusive and open-minded.

Operationally, many of the senior staff of UEM Sunrise were from the former Sunrise, including both the current Chief Operating Officers. Unlike some other acquisitions we are familiar with, most of the staff of Sunrise stayed on, years after the completion of the acquisition.

If you ask any of the senior staff, there is no question that the main contributing factor was Wan Abdullah.

The fact that he accepted me as the Chairman of the Development Committee, even as I was the previous CEO of the acquired company, speaks volume of his humility. Wan is a man with a big heart rather than a big ego.

What does this mean to the company Wan led? By any financial measurements, it has been a success. Pre-tax profit rose from RM129 million in 2006 (when he joined UEM Land as CEO) to RM686 million in 2013. Total assets now stand at almost RM10 billion, up from just RM3.5 billion in 2006.

Wan coined the term “tipping point” and predicted rightly that 2012 will be the year when the developments in Iskandar Malaysia, Johor, will accelerate from dreams and ideas, to real investments and activities.
He led UEM Land into some of the most successful projects in Iskandar Malaysia, as catalysts to bring in more investments, employment and homes. These projects include Puteri Harbour, Mall of Medini, Bio-XCell, Horizon Hills and Motorsports City among many others. He helped to oversee the transformation of Iskandar Malaysia from a vast barren land into a thriving property hotspot.

As my colleague on the board of M+S Pte Ltd, he proved to be also willing to listen and learn, just as he is ever willing to lead.

While some may see Wan as fairly impatient at times, my own impression of him is quite the opposite. So very often, I saw some people putting his patience to the test. Yet, Wan always came through. He was always willing to be tolerant, to be patient and to slowly win over his detractors. I would have blown my top many times over.

I have a few fond memories of Wan as a friend. Together with his family, they visited me in Vancouver, Canada. In England on a business trip, we managed to watch a couple of football matches, including the game between Manchester United and Arsenal, and the game between Chelsea and Tottenham Hotspur.

Wan led a good life. He left many legacies too, including the success of UEM Sunrise and his many contributions to Iskandar Malaysia and the M+S projects in Singapore. These are only those I am personally aware, and I am sure there are plenty more.

More than anything else, in the few occasions I shared with him as a friend, I believe he is first and foremost a family man. To his family, I pray that God will continue to bless all of you and that his life’s story will be the light that shines your future path.

To the rest of us, it’s a reminder that life is short. Go do something great this year. Do something kind this week. Go hug your kids today.

Tuesday 25 February 2014

Fried sweet potato starch

My dinner last night was at an interesting restaurant in Old Klang Road. Pu Yuan's address is 112, Batu 4 ½, Jalan Klang Lama.

Looking for the place is an adventure in itself. Coming from Mid Valley, look out for SJK (C) Choong Wen on your left and turn left immediately.

The fried sweet potato starch is unique and very good. A meal of five dishes, including deep fried wheat chicken, vegetables and noodles cost RM40 in total. I thought it was rather good value.

You need to walk a short distance of a narrow back lane to get to the front door. And it does not look much of a front door, nor a back door. A bit scary actually. But once inside, it is surprisingly clean, comfortable and air-conditioned.

Well worth the effort… good food, comfortable and value for money.

Saturday 22 February 2014

Turbulence in the skies — the options left for MAS

Malaysian Airline System Bhd’s (MAS) latest earnings results for the last quarter of 2013 underscore our previous opinion that simply boosting capacity and load factor without a concurrent — and huge — cut in operating costs would not be sufficient to turn the company around.

MAS reported a net loss of RM343 million in 4Q2013 and a cumulative loss of RM1.17 billion for the whole of 2013, compared with a net loss of RM432.6 million in the previous year.

This is despite the company raising the available seat kilometres (ASK) and revenue passenger kilometres (RPK) by 17% and 27% respectively. Its load factor also increased to 81% from 74.7%.

These statistics show that MAS flew more flights and passengers, and filled more of its seats. And yet, it lost money big time.

So, what needs to be done for MAS to break even?

We analysed its latest earnings results, ran the numbers and came up with three options, including one that is rather interesting, plausible and, most certainly, controversial.

Option 1: Boosting load factor to 96.7% on current capacity

For all our scenarios, we assumed a consistent 40:60 fixed-to-variable cost structure (excluding interest expense), and average yield based on total revenue per RPK for the sake of simplicity.

In the first scenario, we conclude that MAS can achieve breakeven at the pre-tax level if it boosts its load factor to 96.7% on its existing capacity (ASK) of 58,381 million seat kilometres.

Casting aside the practical impossibility for any airline to maintain such a high load factor, this scenario also requires that the average revenue or yield remains unchanged at 31.74 sen per RPK. This is highly doubtful.

Consider this — MAS’ yield fell from 36.87 sen per RPK in 2012 to 31.74 sen last year in order to lift its load factor from 74.7% to 81%. That is a load factor increase of 6.3%.

To raise the load factor further to 96.7% means another hefty increase of 15.7%. It is safe to say that to attract this many more customers, MAS would have to reduce its pricing. But as prices (yield) fall, even a load factor of 96.7% would not return the company to the black.

More importantly, AirAsia Bhd, one of MAS’ biggest competitors, has a much lower cost structure. Its operating cost per RPK is almost half that of MAS’ — about 17.5 sen compared with MAS’ 33.3 sen. Thus, even if MAS decides to reduce prices, AirAsia could well match it — and still come out ahead.

Option 2: Cut cost by RM1.1 billion

A more viable option is to cut cost. To be fair, MAS has been doing this over the past year, except that it was just not deep and fast enough to outpace the even steeper decline in yields. The average operating cost per RPK fell 12% while average yield fell an outsized 14% in 2013. In absolute terms, total operating costs rose by RM1.7 billion or 11.7%.

Based on last year’s earnings results, the company would need to shave off another RM1.1 billion in total operating cost (excluding interest expense) — equivalent to a roughly 7% reduction across the board — to break even.

While the figure does not appear too daunting, it should be noted that a good portion of its costs is beyond its control. This includes fuel costs, and handling and landing charges. Others such as depreciation and amortisation are, by and large, fixed. For those costs that are somewhat more flexible, we did a back-of-the- envelope calculation of the quantum of reduction required for one possible combination.

To save RM1.1 billion, MAS could cut staff and aircraft maintenance costs by an average of 11%, and commission and all other expenses by an average of 25%.

To say this is a tough task would be putting it mildly. The quantum of cost cutting required is certainly not impossible but the political will to execute and see through such a painful exercise is highly questionable. Indeed, this option has been articulated in the past but never fully implemented.

To be sure, there are many other possible permutations to lower costs. For the current year, MAS is focusing on increasing assets utilisation (reducing the aircraft downtime) and swapping older planes for more fuel-efficient ones. But these are longer-term solutions that would require time before any material impact is felt.

Another option would be to reduce net interest expense — which totalled RM323 million in 2013 — either by refinancing its loans at a lower rate or raising equity through another cash call. Both alternatives appear unlikely. Globally, interest rates are on the rise and MAS had just raised some RM3.1 billion in rights issue in July last year.

Option 3: Dumping the competition out of the skies

MAS’ latest results underscore the fact that boosting the load factor without any major new investments is not a solution.

Our calculations show that it would have to raise its load factor all the way to 96.7% just to break even. This is practically impossible and yields will keep falling anyway as competitors such as AirAsia have lower cost structures. Slashing cost deeply may work but if history is any guide, the political will to execute such a plan is weak.

This leaves us with one last possible scenario — dumping the competitors out of the skies, for good.

MAS could go on an expansion binge. Armed with the increased capacity, it could then move aggressively to capture market share by throwing prices. It would suffer greatly in the near term as losses would balloon — although the average cost will drop with expenses spread over a larger capacity, yields will fall even faster.

But it would outlast its competitors in the bloodshed because it is funded by cheap government money. After it has finished off its main competitors, the company would be free to raise prices again and start making money.

By any definition, this option will qualify as an anti-competitive practice subsidised by the government. But it is nonetheless, a plausible move.

Extreme measures in extreme circumstances, when all else have failed?

We can already hear Tony Fernandes screaming his head off!

Thursday 20 February 2014

From fish market to stock market

Last week, we highlighted the fact that retail investors were net buyers in Bursa Malaysia, the first time since August last year.  Using the latest data up to 18 February, the share of transaction value of small cap stocks rose to over 25% of the total value of transactions on Bursa, from an average of about 10% since January.

With retail investors turning net buyer with higher volume turnover, it pushes up the performance of small cap stocks. Since early February, the small cap stock index has substantially outperformed, rising by 7.3% against 2.6% for the FBM KLCI.

What does this mean?

Widening risk bandwidth, underperformance of premium assets, higher interest rates and inflation, generally leads to higher risk appetite to catch up on returns. I think this is exactly what is happening. Small, unknown and illiquid stocks are pushed. The warnings signs are everywhere. Please be careful.

It reminds me of a story told by an elderly friend. When people go to the stock brokerages after they have finished their shopping at the wet markets, it may be time for the smart investors to go home and take a rest.

The Edge Malaysia this week has a more insightful analysis of the above and other recent trends, including on whether Malaysia’s credit rating is already effectively discounted. What is the bond market trying to tell us?