Spotlight: Cebu Air, Inc (CEB)

Business Overview

Cebu Air, Inc. (the Parent Company) is an airline that operates under the trade name “Cebu Pacific Air” and is the leading low-cost carrier in the Philippines. It pioneered the “low fare, great value” strategy in the local aviation industry by providing scheduled air travel services targeted to passengers who are willing to forego extras for fares that are typically lower than those offered by traditional full-service airlines while offering reliable services and providing passengers with a fun travel experience.

In 2005, the Parent Company adopted the low-cost carrier (LCC) business model. The core element of the LCC strategy is to offer affordable air services to passengers. This is achieved by having: high-load, high-frequency flights; high aircraft utilization; a young and simple fleet composition; and low distribution costs.

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.

Major Subsidiaries

Here is a complete chart of JG Summit Holdings, showing its 67.23% ownership of Cebu Air, Inc.  Cebu Air recently acquired Tiger Air last March 2014 at a net cost of Php265.1M.  (Goodwill offset by operational losses).

(Click the view larger image)

Key People 

(c) Forbes.com

1.) John L. Gokongwei Jr. - Founder and Chairman Emeritus of JG Summit Holdings.  Other notable companies he holds:  Robinson Retail Holdings (Chairman & CEO), Oriental Petroleum & Minerals Corporation (OPM) (Director), MERALCO (director).  MBA Graduate from De La Salle University and attended the Advanced Management Program at Harvard Business School.

(c) Romulo.com

2.) Ricardo J. Romulo- Chairman of the Board since 1995.  Director of JGS,  PhilamLife, Zuellig Pharma among others.  Former Makati Business Club for 19 years (1987-2006).  He is the brother of John Gokongwei, Jr.  He received his Bachelor of Laws degree from Georgetown University and Doctor of Laws degree from Harvard Law School.

(c) uic.com.sg

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

(c) wsj.com

4.) Lance Gokongwei-  President and Chief Executive Officer of the Group since 1997.  Other positions that he hold:  President & CEO (Universal Robina Corporation) , President & COO (JG Summit Holdings, Vice-Chairman & CEO (Robinson Land), Chairman (Robinson's bank), Director (OPM and MERALCO).  He is the only son of John Gokongwei.  Received his Bachelor of Science degree in Finance and a Bachelor of Science degree in Applied Science from the University of Pennsylvania.

(c) Romulo.com

5.) Jose F. Buenaventura  - Director since 1995. Senior Partner w/ Ricardo Romulo at their law firm.  Board Member of BDO Unibank, Melco Crown, Philippine First Insurance, Philplans First, among others.  Law graduate from Ateneo, Masters of Law from Georgetown University.

(c) Inquirer.net

6.) Robina Y. Gokongwei-Pe - Director since 2007.  President & COO of Robinsons Retail Holdings.  Director of : Robinsons Land, JG Summit, Robinsons Bank.  She attended the University of the Philippines-Diliman from 1978 to 1981 and obtained a Bachelor of Arts degree (Journalism) from New York University in 1984.

Dividend Policy

Regular cash dividends of Php1 per share were given for the past 3 years.  In 2013, Special dividend of Php1/share was given.

Quick Numbers

Fundamentals

Book Value of Equity (AR 2014): ~Php21.54B

Outstanding Shares: ~606M

BV/share: Php 35.54


Debt Ratio (Long term): 57%
Beta: 0.88
Cost of Capital: 6.8%  (estimated debt cost 3.2% but 6% max is used)


Net Income: 
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

Cebu Air's Net Income has been volatile mainly due to 2 risk elements:  Commodity price (oil) and  Foreign exchange losses affecting loan interest costs.  For 2014, Cebu Air incurred around Php2.3B worth of losses due to hedging (oil price drops) while in 2013,  foreign exchange losses amounted to Php2B.  Despite the fluctuations, if the company would be able to maintain around Php1B in Net income year on year, then the above Fair Value could be achieved, even more.

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.

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Technicals

Hopefully, it's a bullish pennant that we see onwards to breaking resistance at 98, or the price will retreat back to 80 levels (green upwards trendline which coincides with 200 EMA).  Seems to me a range trade for some time until that resistance gets broken.

Analysis

No doubt, Cebu Air Inc is the leader in Philippine air transportation and we can see through its revenues that business is good.  As mentioned earlier, the company should improve on its risk management strategies.

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.

References: Financial Statement of CEB (AR 2014)
                    Images found via Google search

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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.