By: Tony Lopez
Cebu Pacific’s share price has taken a beating following an announcement that Tonyboy Cojuangco’s group has tied up with the region’s pioneer and biggest, AirAsia, to operate budget flights in and out of the Philippines.
A subsidiary of giant JG Summit, Cebu Pacific made its IPO debut on October 26 at an offering price of P125 per share—a rather huge overprice considering that the airline made money only in the year preceding its IPO despite having been a low-cost carrier for over a decade.
At the time of its IPO in October 2010, the P125 price gave Cebu a market cap of P76.65 billion. At about the same time in October, San Miguel Brewery, a real monopoly with 95 percent of the local beer market and more than a hundred years of consistent profitability, was valued by the market at only P125.36 billion, a premium of 63.5 percent over Cebu Pacific which has an unsustainable near-monopoly of budget flights.
True enough, hitting a high of P133.50 after its listing, a gain of 6.8 percent from the offering price, Cebu’s share price has steadily nosedived—reaching a low of P82 on December 17, the date AirAsia announced its intention to operate in the Philippines. At P82, Cebu is a loss of 34.4 percent from its P125 offering price and a loss of 38.57 percent from its high of P133.50 per share. Today, at P111 per share, Cebu stockholders are losing money at the rate of 11.2 percent. The airline is valued only at P68.68 billion, down P8.65 billion.
In contrast, SMB has risen dramatically scaling a 52-week high of P31.95 per share before correcting to P29.90 on December 28 after languishing at around P9.93 for several weeks prior to the run-up that began in mid-November 2010. Today, SMB is worth P453.83 billion, a massive gain of P300 billion, or 197 percent in less than two months. The market is valuing SMB for what it really is—a strong monopoly, no rivals, robust cash flow, and a history of consistent consumer focus. EBITDA [earnings before interest, taxes, depreciation and amortization] is about P80 billion in 2011. (Disclosure: I don’t have SMB shares).
If you invested P1 million in Cebu Pacific in October, it would be worth just P890,000 today. If you placed the same P1 million in SMB in October, it would be worth P3.65 million. In October, your Pl million could buy a Toyota Innova. This month, P3.65 million can buy you a late model BMW 3 Series plus some change to buy a Rolex classic watch.
Cebu Air’s business model is flawed. It is easy to replicate. That is why news of the entry of AirAsia readily sent jitters to the market, prompting investors to dump the stock. On December 17, the day the share price sank to its record low, more than 3 million shares were sold valued at P326 million, 5 percent of the company’s market cap. Another 5 percent, or P353 million were unloaded the following day, December 20 as the stock recovered to P105.
Besides, I think consumers are beginning to get fed up with Cebu Air’s shabby treatment. Cebu hates autistic children. It hates doctors carrying transplant kidneys. It hates half-full flights. So it combines two half-full flights flying within three hours of each other into a single full flight. The problem is that it doesn’t bother to inform the passengers of the two flights beforehand that their flights had been consolidated.
You are a passenger in the first flight. You learn about the cancelled flight. So you check in for the second flight. You will be charged for late check-in—for a flight that has been cancelled! That’s how unreasonable Cebu Air is.
The most successful low-cost carriers are those that treat their passengers fairly and decently. Like Southwest of the US. And AirAsia. To its credit, despite cost-cutting and late entry into budget flights, Philippines Airlines has remained true to its promise of treating its passengers well.
Air Asia has disrupted the airline business in every country it penetrated, offering fares discounted by 50 percent. Its entry has meant low-cost carriers accounting for 49 percent of domestic flights in Australia, 34 percent in Thailand, and 59 percent in India, according to figures by Forbes Asia, which named Air Asia founder and CEO Tony Fernandes its Businessman of the Year 2010.
Fernandes launched AirAsia in 2001 as a no-frills airline patterned after Ryanair of Ireland. Today, according to Forbes, AirAsia has 8,000 employees, 100 planes, over 100 million passengers a year, and 140 routes, with hubs in Malaysia, Thailand and Indonesia. The Philippines is the only major Southeast Asian country where AirAsia does not operate. AirAsia makes about 23-percent net profit for every $100 of revenue.
So now, let the dog fight begin.
Cebu Pacific’s share price has taken a beating following an announcement that Tonyboy Cojuangco’s group has tied up with the region’s pioneer and biggest, AirAsia, to operate budget flights in and out of the Philippines.
A subsidiary of giant JG Summit, Cebu Pacific made its IPO debut on October 26 at an offering price of P125 per share—a rather huge overprice considering that the airline made money only in the year preceding its IPO despite having been a low-cost carrier for over a decade.
At the time of its IPO in October 2010, the P125 price gave Cebu a market cap of P76.65 billion. At about the same time in October, San Miguel Brewery, a real monopoly with 95 percent of the local beer market and more than a hundred years of consistent profitability, was valued by the market at only P125.36 billion, a premium of 63.5 percent over Cebu Pacific which has an unsustainable near-monopoly of budget flights.
True enough, hitting a high of P133.50 after its listing, a gain of 6.8 percent from the offering price, Cebu’s share price has steadily nosedived—reaching a low of P82 on December 17, the date AirAsia announced its intention to operate in the Philippines. At P82, Cebu is a loss of 34.4 percent from its P125 offering price and a loss of 38.57 percent from its high of P133.50 per share. Today, at P111 per share, Cebu stockholders are losing money at the rate of 11.2 percent. The airline is valued only at P68.68 billion, down P8.65 billion.
In contrast, SMB has risen dramatically scaling a 52-week high of P31.95 per share before correcting to P29.90 on December 28 after languishing at around P9.93 for several weeks prior to the run-up that began in mid-November 2010. Today, SMB is worth P453.83 billion, a massive gain of P300 billion, or 197 percent in less than two months. The market is valuing SMB for what it really is—a strong monopoly, no rivals, robust cash flow, and a history of consistent consumer focus. EBITDA [earnings before interest, taxes, depreciation and amortization] is about P80 billion in 2011. (Disclosure: I don’t have SMB shares).
If you invested P1 million in Cebu Pacific in October, it would be worth just P890,000 today. If you placed the same P1 million in SMB in October, it would be worth P3.65 million. In October, your Pl million could buy a Toyota Innova. This month, P3.65 million can buy you a late model BMW 3 Series plus some change to buy a Rolex classic watch.
Cebu Air’s business model is flawed. It is easy to replicate. That is why news of the entry of AirAsia readily sent jitters to the market, prompting investors to dump the stock. On December 17, the day the share price sank to its record low, more than 3 million shares were sold valued at P326 million, 5 percent of the company’s market cap. Another 5 percent, or P353 million were unloaded the following day, December 20 as the stock recovered to P105.
Besides, I think consumers are beginning to get fed up with Cebu Air’s shabby treatment. Cebu hates autistic children. It hates doctors carrying transplant kidneys. It hates half-full flights. So it combines two half-full flights flying within three hours of each other into a single full flight. The problem is that it doesn’t bother to inform the passengers of the two flights beforehand that their flights had been consolidated.
You are a passenger in the first flight. You learn about the cancelled flight. So you check in for the second flight. You will be charged for late check-in—for a flight that has been cancelled! That’s how unreasonable Cebu Air is.
The most successful low-cost carriers are those that treat their passengers fairly and decently. Like Southwest of the US. And AirAsia. To its credit, despite cost-cutting and late entry into budget flights, Philippines Airlines has remained true to its promise of treating its passengers well.
Air Asia has disrupted the airline business in every country it penetrated, offering fares discounted by 50 percent. Its entry has meant low-cost carriers accounting for 49 percent of domestic flights in Australia, 34 percent in Thailand, and 59 percent in India, according to figures by Forbes Asia, which named Air Asia founder and CEO Tony Fernandes its Businessman of the Year 2010.
Fernandes launched AirAsia in 2001 as a no-frills airline patterned after Ryanair of Ireland. Today, according to Forbes, AirAsia has 8,000 employees, 100 planes, over 100 million passengers a year, and 140 routes, with hubs in Malaysia, Thailand and Indonesia. The Philippines is the only major Southeast Asian country where AirAsia does not operate. AirAsia makes about 23-percent net profit for every $100 of revenue.
So now, let the dog fight begin.
No comments:
Post a Comment