For the past 3 years, 78% of the Company's revenues come from Passenger Services, 16% from Ancillary Services, and 6% from Cargo. According to Civil Aeronautics Board (CAB) data, Cebu Pacific is the leading domestic airline in the Philippines by passengers carried, with a market share of 60.8% for the year ended December 31, 2014.
3.) James L. Go - Director since 2002. Chairman/CEO of URC Philippines and OPM. Chairman of Robinson Land. Director of PLDT since 2011. Director of MERALCO since 2013. Received his Bachelor of Science Degree and Master of Science Degree in Chemical Engineering from Massachusetts Institute of Technology, USA
Dividend PolicyRegular cash dividends of Php1 per share were given for the past 3 years. In 2013, Special dividend of Php1/share was given.
Debt Ratio (Long term): 57%
Cost of Capital: 6.8% (estimated debt cost 3.2% but 6% max is used)
2014 : Php 1.06B
2013: Php 256M
2012: Php 3.52B
time-weighted average NI: Php 1.31B
A conservative assumption of long-term growth (3% yearly), would put the fair value of the company (based on earnings - DCF analysis) by at least:
Fair Value/share: Php 251.53
Notably, 2014's operational income is almost 2x the previous year at around Php4B. This goes to show that the company is very profitable, but just needs proper risk management to improve net profit margins.
For a capital intensive company, it's good to see that debt costs are low for as much as 4-6%. Interest rate risk should also be monitored with the expense already reaching Php1B this year. For the year 2014, huge losses were incurred due to commodity price hedging (oil). It has been said that for every $10 change in oil price, its effect on the pre-tax income of CEB would translate to around Php1.7B. Not sure if the recent Php2B loss on hedging is to be considered as mitigated loss. Considering the drastic fall of oil prices last year, it could have been worse.
Would it be possible to sustain a Php1B Net income every year? It's actually just a small portion of the company's Gross Revenue at Php52B. So where did all the money go? Operating Profit Margin may be small as almost 90% goes to operational expenses. Php4B is alloted to depreciation costs, way bigger than the annual net income, but it is still ready cash for the company. The average age of CEB planes is just around 4 years, compared to a depreciable life of 15. This means a lot of the expenses are mainly capital outlays; that for the succeeding years, expenses are expected to drop. Operating Cash Flows is at Php7B on 2014, almost twice that of 2013.
Given that Cebu Air will continue to dominate Philippine air transportation even considering saturated growth maintained at current levels, the company remains to be profitable. Challenge left to Cebu Air executives is on how they can manage risk (they have lost a lot from financial derivatives -- should they continue?) and cost management to increase margins.
Personally, I have just started my position on CEB and will likely start to accumulate. I only first started monitoring this stock after COL released its 2015 guidance, showing a major upside for CEB. I wanted to take a look myself, and as it turns out, I even gave it a higher FV despite trying my best to use conservative assumptions. Another blog earlier posted a fundamental analysis on this stock which you should check out: http://www.alphainvestments.ph/is-cebu-air-truly-worth-php150/ . So far, it's unanimous, CEB is undervalued.
Images found via Google search
This post does not give a comprehensive analysis on the company/industry. This is only a summary or a company snapshot as of the date it was posted. Spotlight stocks featured in this blog are being chosen arbitrarily, and are only intended for the blog owner's personal consumption; not as a form of solicitation to buy or to sell. Comments from readers who would like to point out errors, to share ideas, etc are most welcome.