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PAL really in BLACK? A fool's game

bauer · 9 · 3659

bauer

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on: Aug 17, 2014, 03:35 PM
PAL really in black?

We were recently pounded by news that in only as short as two years, RSA was able to turn around PAL from almost perennial losses to finally achieve a positive income of close to 1.5 Billion pesos.  Many newsreaders and retail stock investors were surprised and believed the press release and this is what RSA is hoping to realize ---- media mileage (that he is a great & wise businessman), higher stock price (unskilled investors will pile up on PAL stocks), and ‘justification’ about the ‘sweetness’ of their marriage (between SMC and LT group).  But, are all of these things really true?  Is this just media hype?  Don’t we have enough brilliant finance journalists around to check the real story?

When I heard the news, I was immediately skeptical because I remember that I had just read the financial report (September 2013) of PAL and it will take decades to unwound the financial problems besetting the airline.  So rather than share my opinion, thereby risking putting my foot in the mouth, I waited until PAL officially released an unaudited latest financial report to the PSE.  My opinion shared on this forum is my own interpretation and analysis to help online readers understand better how finance and accounting works in real case scenario.  I also hope that hapless retail stock investors will take a quizzical look in my opinion to help them make a better decision before investing their hard earn money in an airline stock such as PAL.

First this confirmation, almost 1.5 billion operating income is partially true.  Why partially true?  In a 3-month period of 2014 compared to the 3-month period of 2013, PAL indeed made a paper income of 1.5 billion.  But I believed this is a misleading picture of the company’s true income.  If we will compare the 6-month period of 2014 (January to June) and the 6-month period of 2013, PAL’s income was reduce to 560 million pesos.  Furthermore, total comprehensive income for the same 6-month period is only 361 million pesos (after a deduction in net changes in fair values of assets-for-sale and foreign exchange translation).

An income is still an income no matter how ‘insignificant’ the amount of 361 million pesos (total revenues of almost 49 billion pesos).  Is it time to celebrate the success of RSA?  Not quite, part of revenues (not from passengers and cargoes) represents almost 10% of total gross income equivalent to 4.4 billion pesos (classified as other income).  What is this other income----- it was not explained clearly in the report,  but I have a good guess ---- contained in the same report is a term (refund of aircraft pre-delivery payments) in the amount of 5.3 billion pesos.  Can PAL explain this transaction openly?  There was also a significant amount (521 million pesos) classified as income on manufacturer’s incentives that was deduced from operating income before working capital changes that needs an obvious explanation.

Another aspect is the press release that PAL acquired brand new planes and not just a few ones but in their report, their fleet is now 85 compared to December 2013 of 79 or a net addition of 6 planes.  The September 2013 report stated 69 planes and the March 2013 report stated 64 planes.  So if we will compare the March 2013 report versus the June 2014 report, there was a net addition of 21 planes in just a short 1 year and 3 month period.  But, when we checked the reported total assets of PAL, there was a reduction of about 7.5 billion pesos (114 B to 106.65 B).  21 planes were added to the fleet and the assets were reduced?  How did it happen?

Well, there were 3 types of plane acquisition classification smartly employed by PAL --- owned, finance lease, and operating lease.  The bulk of planes were under operating lease (41 planes).  Under operating lease, the assets and liabilities of plane ownership will not be reflected in PAL’s book.  Is it a smart move, right?  But we need to pause, does the ordinary investor fully knows that Fortunate Star Limited (FSL) is 40% owned by PAL itself? FSL happens to be the owner of the 41 planes. 

How critical is PAL’s finances right now?

Well, nothing changes compared to previous reports, only that the liabilities was hidden somewhere (FSL?).  Current asset is only about 20 billion pesos while current liability was still a gargantuan 65 billion pesos.  Whoever owns PAL needs to chalk up the difference to avoid bankruptcy. 

For short term stock traders of PAL ---- let me give you a computation of PAL’s tangible book asset value.  Latest total net equity is 3.2 billion pesos and divided it to total number of common outstanding shares equivalent to 24.8 billion shares.  How much is the latest tangible book value? It’s 0.129 CENTAVOS.  Can anyone please tell me the current market per share price of PAL?

There is a list of issues that I still wanted to raise in terms of PAL’s finances but I do not think PAL will care to respond precisely because there is an ownership struggle besetting the airline.  We all know that LT group was unhappy with the ‘marriage’ but they find it hard to split because of a large ‘separation pay’ that they need to be cough up with SMC. 

The market pretty well understand the image of LT group scrimping payments to its hard working laborers, maybe, the same tactics applies to their ill-chosen partner as well?  Shelling out a reported 1 billion dollars is quite hard to swallow but a bigger rock that will block the esophagus of PAL’s owner is the cost of the new planes several years ahead.

Strong advised to pmt readers and investors:

When we hear and read something in main stream news media, be critical, inquire, check the data, analyze the data, ask around from experts if you do not understand the data, and become a wise investor.

Remember, when foolishness rains in earth, a lot of people tried to catch it openly.  Do not be one of them.

Careful investing! :watchuthink:




« Last Edit: Aug 17, 2014, 03:42 PM by bauer »


alacrity

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Reply #1 on: Aug 17, 2014, 04:52 PM
I read the praise releases too. It only takes common sense to deduce that if PAL was indeed a turnaround then there would be no need to find buyers because what businessman in his right mind would let go of a money making venture?


Brilliant finance journalists? It's almost an oxymoron, see to be a finance journalist you have to get news from somewhere and if your source sees that you don't report it as they see fit then were would you get the news then?

Journalists get and report the sanitized version otherwise there would be nothing at all for them to report.


bauer

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Reply #2 on: Aug 18, 2014, 10:45 AM
Brilliant finance journalists? It's almost an oxymoron, see to be a finance journalist you have to get news from somewhere and if your source sees that you don't report it as they see fit then were would you get the news then?

Journalists get and report the sanitized version otherwise there would be nothing at all for them to report.

It does not have to be this way.  Journalism should involved facts and critical thinking.

When companies call for a press conference, a credible journalist should do a research about the company before proceeding to the venue.  He/she needs to do his/her homework.  While in the venue, the journalist can secure the press release statement and other materials shared by the company.  Upon reading, if she/he does the homework diligently, he/she can ask relevant and thought provoking questions to clarify the statements of the company.  This is journalism at work.

Sad to say, in today's environment, press people just wait for company invitations, attend the press con, partake the food and booze (if any), slightly edit the press material receive, and pass it on to their newspaper publisher for printing.  The editor? He/she does nothing but check the grammar & spelling (like an English school teacher I supposed).  What's the point?  The news publisher is afraid to hurt the feelings of their advertisers.  What's wrong with it?

The readers were forced to swallow whatever they produce, no matter if sh*t is included in it.
« Last Edit: Aug 18, 2014, 10:50 AM by bauer »


wilch23

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Reply #3 on: Aug 20, 2014, 07:47 AM
So the Billion Dollar Question is :
Why is Tan so desperate to get PAL back?


patski

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Reply #4 on: Aug 20, 2014, 09:42 AM
So the Billion Dollar Question is :
Why is Tan so desperate to get PAL back?

Because of LTP, Microasia, Skylogistics and so fort.


GIG

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Reply #5 on: Aug 20, 2014, 10:25 AM
PAL really in black?

We were recently pounded by news that in only as short as two years, RSA was able to turn around PAL from almost perennial losses to finally achieve a positive income of close to 1.5 Billion pesos.  Many newsreaders and retail stock investors were surprised and believed the press release and this is what RSA is hoping to realize ---- media mileage (that he is a great & wise businessman), higher stock price (unskilled investors will pile up on PAL stocks), and ‘justification’ about the ‘sweetness’ of their marriage (between SMC and LT group).  But, are all of these things really true?  Is this just media hype?  Don’t we have enough brilliant finance journalists around to check the real story?

When I heard the news, I was immediately skeptical because I remember that I had just read the financial report (September 2013) of PAL and it will take decades to unwound the financial problems besetting the airline.  So rather than share my opinion, thereby risking putting my foot in the mouth, I waited until PAL officially released an unaudited latest financial report to the PSE.  My opinion shared on this forum is my own interpretation and analysis to help online readers understand better how finance and accounting works in real case scenario.  I also hope that hapless retail stock investors will take a quizzical look in my opinion to help them make a better decision before investing their hard earn money in an airline stock such as PAL.

First this confirmation, almost 1.5 billion operating income is partially true.  Why partially true?  In a 3-month period of 2014 compared to the 3-month period of 2013, PAL indeed made a paper income of 1.5 billion.  But I believed this is a misleading picture of the company’s true income.  If we will compare the 6-month period of 2014 (January to June) and the 6-month period of 2013, PAL’s income was reduce to 560 million pesos.  Furthermore, total comprehensive income for the same 6-month period is only 361 million pesos (after a deduction in net changes in fair values of assets-for-sale and foreign exchange translation).

An income is still an income no matter how ‘insignificant’ the amount of 361 million pesos (total revenues of almost 49 billion pesos).  Is it time to celebrate the success of RSA?  Not quite, part of revenues (not from passengers and cargoes) represents almost 10% of total gross income equivalent to 4.4 billion pesos (classified as other income).  What is this other income----- it was not explained clearly in the report,  but I have a good guess ---- contained in the same report is a term (refund of aircraft pre-delivery payments) in the amount of 5.3 billion pesos.  Can PAL explain this transaction openly?  There was also a significant amount (521 million pesos) classified as income on manufacturer’s incentives that was deduced from operating income before working capital changes that needs an obvious explanation.

Another aspect is the press release that PAL acquired brand new planes and not just a few ones but in their report, their fleet is now 85 compared to December 2013 of 79 or a net addition of 6 planes.  The September 2013 report stated 69 planes and the March 2013 report stated 64 planes.  So if we will compare the March 2013 report versus the June 2014 report, there was a net addition of 21 planes in just a short 1 year and 3 month period.  But, when we checked the reported total assets of PAL, there was a reduction of about 7.5 billion pesos (114 B to 106.65 B).  21 planes were added to the fleet and the assets were reduced?  How did it happen?

Well, there were 3 types of plane acquisition classification smartly employed by PAL --- owned, finance lease, and operating lease.  The bulk of planes were under operating lease (41 planes).  Under operating lease, the assets and liabilities of plane ownership will not be reflected in PAL’s book.  Is it a smart move, right?  But we need to pause, does the ordinary investor fully knows that Fortunate Star Limited (FSL) is 40% owned by PAL itself? FSL happens to be the owner of the 41 planes. 

How critical is PAL’s finances right now?

Well, nothing changes compared to previous reports, only that the liabilities was hidden somewhere (FSL?).  Current asset is only about 20 billion pesos while current liability was still a gargantuan 65 billion pesos.  Whoever owns PAL needs to chalk up the difference to avoid bankruptcy. 

For short term stock traders of PAL ---- let me give you a computation of PAL’s tangible book asset value.  Latest total net equity is 3.2 billion pesos and divided it to total number of common outstanding shares equivalent to 24.8 billion shares.  How much is the latest tangible book value? It’s 0.129 CENTAVOS.  Can anyone please tell me the current market per share price of PAL?

There is a list of issues that I still wanted to raise in terms of PAL’s finances but I do not think PAL will care to respond precisely because there is an ownership struggle besetting the airline.  We all know that LT group was unhappy with the ‘marriage’ but they find it hard to split because of a large ‘separation pay’ that they need to be cough up with SMC. 

The market pretty well understand the image of LT group scrimping payments to its hard working laborers, maybe, the same tactics applies to their ill-chosen partner as well?  Shelling out a reported 1 billion dollars is quite hard to swallow but a bigger rock that will block the esophagus of PAL’s owner is the cost of the new planes several years ahead.

Strong advised to pmt readers and investors:

When we hear and read something in main stream news media, be critical, inquire, check the data, analyze the data, ask around from experts if you do not understand the data, and become a wise investor.

Remember, when foolishness rains in earth, a lot of people tried to catch it openly.  Do not be one of them.

Careful investing! :watchuthink:






First class analysis . . . as usual.


Wills

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Reply #6 on: Aug 20, 2014, 12:29 PM
First class analysis . . . as usual.

+1!


bauer

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Reply #7 on: Aug 20, 2014, 10:55 PM
So the Billion Dollar Question is :
Why is Tan so desperate to get PAL back?

Number 1 reason:

LT Group is afraid that at the end of the day, being the majority owner, LT Group's finances might be compromise due to the VERY AGGRESSIVE DEBT OVERLOAD in acquiring a large fleet of new planes.

Do you notice that there was a late breaking news story that PAL will "modify" the terms of the new planes to be delivered?  The planned new orders will be reduce in volume.

Number 2 reason:

LT Group wanted to SAVE the VALUE of their 51% stake as early as now with the long term view that if they do not act now, the value of their shares will DIMINISH in the near future.

Remember that LT Group made a whisper to RSA to sell all their remaining stakes but RSA wisely replied that 49% is ENOUGH for SMC and LT group is free to sell it to other interested parties.

Who will buy the 51% stake of LT group if the management control belongs to SMC? 

Bottom line  ---- LT group wanted to AVOID financial catastrophe and SAVE their stake.


bauer

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Reply #8 on: Aug 20, 2014, 10:56 PM
@GIG, @WILLS,

Thanks.


 


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