Monday, April 27, 2020

Sold IAG

Sold IAG.  Because:

  • I'm not sure it can survive without a capital injection.  I think it can last 5 to 10 months (Jun to Nov), but the virus may have effects that go on for longer.   Even after the lockdowns are slowly loosened, and even if there is no second wave, it will be a long time before people are allowed to travel.
  • I think the current market rally is a bear market rally.  Use the opportunity to sell.
Loss is around SGD 25K.  This was a hard decision:

  • Can it survive without a capital injection?  Maybe.  Or maybe not.
  • Would I buy it now?  No, because of the above.  I would not catch it as a falling knife.
Longer term, I would like to buy it again.  It may be at a higher price later.  Or it may be at a lower price after they raise capital.  I prefer to sell now and buy it with a clear head later when the risk/reward is better.

Friday, April 24, 2020

IAG: Can they survive?

Rough guess to see how long International Airlines Group can survive without raising capital.

Their balance sheet on Dec 2019:

  • Current liabilities are 6.7bn.  Ignore deferred revenue as advanced ticket sales are refunded with credit and  no one cares about customer loyalty points when there are no flights.
  • They have 2.2bn receivables.  Not sure how much they can collect.
  • They said in March they have 9.3bn cash and undrawn credit.
Their biggest expense is employee costs.  I think it can be cut from 4.9bn to 2.6bn:
  • Flights are reduced by 90%
  • Under the UK Job Retention Scheme (JRS), furloughed employees' are granted 80% of their salary up to 2,500 pounds per month.  Spain's ERTE scheme pays 70% of the salary - the remainder is social security which may be delayed.
  • IAG is paying 80% of their cabin and ground crews' pay through JRS (so IAG will have to pay anything above 2500 the pounds limit). And pilots agreed to take one month unpaid leave in April/May.  I think if it is still bad after this, the pilots need to continue on half pay, or else be let go.
So I estimate total operating costs at 5.9bn:
  • 2bn for IT/property (no change)
  • 2.4bn for staff
  • 0.6 interest payments
  • Operating lease 0.9bn (from 2018 - in 2019 it is lumped under D&A for IFRS16, but this is a cash cost that will still be there).
So I guess they can last 5 months (end June) to 10 months (end Nov), depending on how much of their receivables they can collect.

Natural Gas

Harris Kupperman's natural gas trade looks interesting.  WTI going negative sends a clear signal that oil is not profitable, therefore shale oil shut ins should decrease the supply of natural gas.

What are the chances of it happening?

Around 30m Bcf/day of natural gas production is associated with oil (p19), out of 92 Bcf/day total.  So around 1/3rd of it is associated.

For demand, the EIA predicts a drop in demand due to covid-90, due to less commercial usage (especially restaurants), less industrial and exports.  Slightly offset by an increase in home demand.

There are many moving parts to the thesis.  What are the risks?

  1. Shale oil producers may not begin to cut back until next year, due to hedging.
  2. Even if the supply of natural gas drops, demand may drop further.
  3. Trump may put tariffs on imported oil, or simply force the Saudis from targeting US shale production.  There are good reasons why the US needs its own oil industry.

How would I play it?

Initially I wanted to follow the textbook and but the lowest cost producers.  Cabot, here.  But there are too many things about this industry that I can't understand.  I do not understand industry decline curves, or how much companies have to reinvest to maintain reserves.   Nor well level data.  Or takeaway capacity from the different producing regions.  This industry is difficult to understand, and full of liars.

Better to spread my bets and just trade the FCG ETF.  That removes company specific issues, though it concentrates on the Marcellus.  Most of the companies there are generating cashflows from operations, though many are loss making - but they look like they won't go to zero.  I do not know enough to cherry pick companies or create my own ETF.

This is far from a certain thing, so if I took the trade, I would trade around the position to manage risk.  Take my signals from the market and play a rising natural gas price as it happens.  Don't throw all my bets down on the table and say 'this is definitely going to happen'.

I do not know if or when I'll make this trade.

Tuesday, April 21, 2020


Spanish Airport owner/operator.  Interesting because they have (had) high operating margins, and are trading at 13X trailing (peak) earnings.  But I won't buy yet because too many uncertainties.

Air travel is not allowed in Spain now, except for "reasons that cannot be postponed".  Airports are considered essential services, and must still be run, but many are partially closed.  How long can AENA survive without revenue?


Balance sheet first.  At end 2019:
  1. Current liabilities are 842m, excluding debt.  Current assets (inventories, cash and receivables are 750m).  Thats almost a 100m shortfall, even assuming they can get all their 500m receivables paid.  There is a real risk of airlines going bust.
  2. Ignore long-term debt, at 5.6bn.  Forget this now, worry about 2020 first.  Debt includes lease liabilities (under IFRS 16).
  3. Short-term debt is 1.2bn.  But, 640m of this is from a joint loan with ENAIRE (Spanish Government).  AENA may not have to pay it immediately.  Both ENAIRE and AENA are "mutually obligated to each other before the bank" to pay off the loan.   If AENA does not meet its obligations, ENAIRE will pay off the loan first, then charge 3% plus penalty interest to AENA (bottom p98).  Even if they can defer this, it still leaves 560m to pay this year.
  4. (1st April) AENA has taken 1bn loans that mature in 1-4 years.
  5. (26th Mar) AENA has the ability to issue another 550m of Euro Commercial Paper.  Ignore this now.
  6. Loan covenants (p96) specifies that net debt can be up to 7X EBIDTA and 3X financial expenses.  Measured half yearly.  EBITDA was around 2.8bn in 2019, debt is now around 7.8bn.  So EBIDTA cannot drop below 1.1bn.  Difficult if the lockdown continues.
So, assuming they can delay the 640m short term debt in 3. and assuming they can collect all receivables in 1., they have 580m cash.

What are their cash operating costs?
  • Other operating expenses of 1bn.
          Remove the 158m taxes.  They said they can cut monthly operating expenses by 43m, so remove another 516.  So 400m. 
  • Staff costs: 456m.  ERTE will pay up to 70% of a worker's salary (excluding social security, which is 30%, which the employer can now delay), but AENA has not said they have taken advantage of this program.
  • Interest: 124m.  With the new 1bn loan, let's make it 135m.
  • Thats it: so annual operating costs drop to 1bn.
So, if they can delay the 640m short-term debt, they can last 7 months (end July).  If they can use ERTE for half their employees, then we reach almost 9 months (end Sep).

The key is really point 3 above: can AENA delay paying the 640m joint loan?  Normally I would say yes, but the Spanish government can't print its own money. They are trying to sell AENA in the first place to fill their budget deficit!


96% of their 2019 EBIDTA was from Spain (p56).  I think they own their Spainsh airports (not operating under a concession), but I could not find it in any official document.  Slide 65 talks about a 40 year development plan.

They manage nearly 50 airports in Spain.  A few of them are very busy, like Madrid or Barcelona, but there is a long tail of underused airports.  "One estimate has it that all but eight of AENA’s airports are regularly unprofitable. And some of the more remote ones do not even see daily flights."  So they are running these as a public service.

A large proportion of their passengers are domestic or from the EU (slide 52), so they are not big spenders.

Operating margins were 44% in 2018 and 2019.  Pretty high.


Spain has a good high-speed rail network as an alternative to domestic flights.


AENA can probably survive, the issues are:
  1. Can they delay their 640m short term debt?
  2. Collecting 500m receivables (from airlines?)
  3. Can they reduce staff costs by using ERTE?
  4. Assume banks wont enforce the debt/EBIDTA covenant.
I'm guessing they have an 80% chance of surviving without issuing new equity.

This company is more risky than Grupo Aeroportuario Centro Norte as they have less cash, but has higher upside because they own their airports.  My gut feeling for this one is to wait for their 2Q results for more clarity.

Really hard to know what to do for this one.  I want to buy highly profitable airports (that are owned, not leased).  But 4 points above need to be cleared up.  But when things are 100% clear, the stock price will have recovered.


Company news updates are here (they call it "Inside Information").

Sunday, April 19, 2020

Disney Part 3: The rest of the company, and valuation

The rest of Disney is well known: movies, theme parks and toys.

Disney sells stories that children love.  They take the money, risk and time to craft stories and characters that touch young audiences.  This is a bit of an art - throwing more money into a movie does not make it better.  This makes children to spend money on Disney's other products: merchandise and theme parks- the flywheel effect - buying one service from the company leads you to buying more.  From Walter Disney himself:

Disney recently bought Twenty First Century Fox (TFCF), increasing their debt to 48bn.  Probably for content to put on Hulu and Disney+.

Disney+'s Profitability

Disney+ launched in October and wildly exceeded expectations.  Its going to become an increasingly important part of their business.  How profitable is it, and is it going to burn cash like Netflix?

Disney capitalises film and television production costs, and amortises them over time:

"Film and television production, participation and residual costs are expensed over the applicable product life cycle based upon the ratio of the current period’s revenues to estimated remaining total revenues (Ultimate Revenues) for each production....For television series, Ultimate Revenues include revenues that will be earned within ten years from delivery of the first episode, or if still in production, five years from delivery of the most recent episode, if later."

Not sure of this applies to their Direct-to-consumer segment - could not find it in the 1Q results,  though they amortise TFCF and Hulu content (Search for "intangible assets").  In that quarter, CFO dropped 0.5bn to 1.6bn (top p8), due to "higher film and television production spending".  That may be it.

So Disney+ Direct-to-consumer operating profits do not necessarily translate to CFO.

Since I can't get anything from Disney's results, lets estimate in other ways:

  • If season 1 of "The Mandalorian" cost $120m to make, making 30 series a year comes up to, lets say, 3bn (not all shows will be that expensive).  With their current subscriber base of 28.6bn (revenues of 1.8bn/year), thats a cash outflow of 1.2bn. 
  • In 2019, Netflix had 20bn revenues but still burned 2.9b CFO.  Rough guess, they burn around 18bn/year on production and acquisition of titles.  If Disney+ follows this, they will expand production as they grow bigger, but less than Netflix, since they are fundamentally different.  Netflix's business is to get you watching as long as possible ("We're competing with sleep").  They try to be everything to everyone.  Disney's more focused business is to get children to love their characters and spend money on them. Also, Disney already has a large catalog of movies, plus TFCF.

I expect Disney+'s subscribers and costs to grow, similar to Netflix's past trajectory, but on a smaller scale.  How do you value something like that?


Disney has no video game IP (eg: pokemon, minecraft).  Its a glaring hole in their entertainment business.  They are great at films/movies, but that does not translate into video games.  This essentially means you are ignoring half the population.

2019 was the peak of the movie cycle.  Expect a decrease in movie revenues over the next few years:

  • The top grossing movie of all time, Avengers Endgame, completes a 22 movie arc.  Two main characters are dead.  This year has movies with minor characters, and they will take a few years to "build up" the characters/universe again.   Don't expect another big hit from the Marvel universe for a while.
  • After initial excitement, Star Wars revenue has declined for each of their main movies, culminating in a loss for the 2018's "Han Solo" movie.  They fucked it up by producing bad movies too quickly, and need to slow down.

Disney has been through long bad periods before.  The 60s to the end of the 80's was considered Disney's "dark age", when they did not know what types of movies they were producing.  The company nearly went bankrupt.

There was a second smaller "Dark Age" from 2000 to 2009.  Movie making is a hit-and-miss business.  Despite all the "magic" of Disney's brand and characters, its easy for them to lose sight of what they're doing and get a string of misses.


Lets make a conservative long-term scenario for Disney (while forgetting about the coronavirus).

Assume long term profits in Movie Studio and Parks get back to 2019 levels.  ESPN moves entirely to ESPN+, losing all affiliate fees, but advertising is unaffected.  ESPN+'s price rises to $10/month.  ESPN's sports rights costs do not increase.  Disney's OTT competes with Netflix: they are both different services, so many will subscribe to both.  The key question is, can OTT make up for ESPN's decline?

Basic stats:

  • 128m households in the US.  45m of them have children, 30m of them have both parents with the children.
  • Netflix has around 60m US subscribers and over 100m international subscribers
  • Hulu currently has 28m subscribers
  • 115 million NFL fans in the US.

Lets take:
  • 30 million US households using the Disney+, Hulu & ESPN+ bundle for $17/month (currently $13/month, but expect ESPN+'s price to rise as it replaces ESPN).  So 6.1bn streaming revenue.
  • Another 20m other households are sports fans and subscribe to ESPN+ @ $10/month.  2.4bn revenue.
  • 50m international subscribers to Disney+ only @ $7/month (assume the increase the price a bit).  NFL/baseball are purely American sports, so forget about ESPN.  Gives another 4.2bn revenue.
So 12.7bn revenue.  Minus 5bn annual cash production costs for Disney+.  Gives 7.7bn, to offset against the current ESPN affiliate fees of 9bn.  So thats a 1.3bn  drop in operating profit, or a 12% drop.  This is purely guesswork, but they are reasonable numbers so its the best we can do.  At 15X earnings, you would pay $82 per share.

Disney Part 2: ESPN

Continuing with Disney, their largest segment is actually ESPN, which is in long term decline.

At Sep 2019, the largest contributor to Disneys' earnings is Media Networks (44% of profit):

Media Networks is domestic, mostly cable TV, with a little free-to-air broadcast.  It excludes OTT (Hulu, ESPN+, and Disney+).  Most of it is from ESPN, with a little from other channels such as Nat Geo and Sesame Street:

What is ESPN?  It is the dominant live sports channel, playing 24/7 sports rubbish.  Their main sports providers are NFL, NBA and MLB.  Their business model has been to aggregate all sports under one channel.  "When you think of sports, you should think of ESPN".

This business model has high fixed costs:

ESPN's domestic subscriber numbers have been in long term decline:

Source: Disney Annual Reports

A lot has been written about ESPN being squeezed.  The cost of rights is expected to increase, while subscriber numbers are dropping.  Viewership may also be dropping: sports results can be obtained online now, and people have more to do than watch TV (Fortnite, twitch, Youtube, Netflix, Periscope).  This hurts their advertising.  ESPN is a distributor in a world where distribution is becoming cheap.  Or free.

They have been managing the decline by raising prices slowly.  The average subscriber fee has risen from $7 in 2016 to $9 today.  I think they are slowly trying to segregate the market into those watch sports and those who don't.  And see how much those who watch it will pay.  They will switch ESPN to OTT sometime, but they don't know when ("There will be a time...when the pay TV numbers are low enough, and all you have are sports fans that are in that bundle...does it make sense at that point, rather than wholesaling a sports fan bundle, to be a retailer...I'm not sure where the precise crossover point would be").

The 3 big risks are:

  • Will the remaining sports fans be willing to pay enough to make it worthwhile?  Its been estimated ESPN would have to charge $30 a subscriber to maintain profitability.  And ESPN may pay more when the rights are renewed in 2021/2022.
  • How and when do they switch?  If they gradually switch the popular sports to ESPN+, this makes ESPN less valuable, reducing the money they can pay for rights.  If they don't switch, ESPN slowly becomes irrelevant to everyone.  Sports providers deal with ESPN now because they (still) have the largest broadcast exposure, and the most cash. They can't switch it fast, and you can't switch it slowly.
  • Other players (Google, Amazon, Apple, FB) may bid for the rights.  Or the providers go OTT themselves.

Valuation of ESPN

How do you value a business that is in decline and will undergo disruption?  Hopefully self-inflicted disruption.  Even the executives say they "don't know" when they will go OTT.  So we can't value it.  You can come up with many scenarios (N subscribers paying $X per month) - I'll do this later.  But no one really knows.

ESPN is the riskiest part of Disney's empire.  Theres a chance it will be unrecognisable in 5 years time.

Disney Part 1: Survival

Disney is a great company I'd love to buy, but let's see if they can survive first.    They have been hit hard by the coronavirus, shutting down theme parks, hotels, movie studios, and sports.  The company has high fixed costs.  How long can they last without a capital injection?

Balance Sheet

At Dec 2019 (p13), they have:
  • 8bn cash, 18bn current receivables and 20bn current payables.  So net 6bn, assuming they can collect all their receivables.
  • 10bn in current borrowings.
  • 5bn in deferred revenue and other current liabilities.
So we are at -9bn.

They have 12.8bn in unused commercial paper (p103, plus this, and subtracting 1.2bn on p14).
Since December, they have issued another 7bn new notes (1) (2).
So they have 10-11bn headroom.  Again, assuming they collect all their receivables.

Cash Burn

I try to estimate their cash burn during the coronavirus period from their segment operations (pp37-44).  For most numbers below, I am using the full year (ending Sep 2019) results:

  • Media networks.  This is mostly cable (which is mostly ESPN), and some broadcast free-to-air (like ABC's Sesame Street).  Assume Broadcast revenue remains.  But Cable revenue gets halved (ESPN has no live sports - assume half the subscribers up for renewal cut subscription).  Get a cash burn of 0.5bn per year.
  • Parks, Experiences and Products (merchandise).  Assume merchandise revenue is cut from 4,5bn to 1bn (eg: Spider Man toys and Frozen crap).  Everything else for parks & resorts is zero.  On the cost side: Reduce operating expenses from 14bn to 6bn (staff reduced from 6.2bn to 4bn), and SG&A from 3 to 1bn.  Ignore D&A as non-cash.  So they burn 6bn cash a year.
  • Studio Entertainment.  This is movies in theatres, plus distribution for home entertainment (DVDs, pay-per-view and licensing for cable/free-to-air, excludes OTT).  Assume no Theatre distribution revenue, but unchanged revenue from Home Entertainment and TV/SVOD.  On the cost side, ignore 3.7bn of the operating expenses which is amortisation, and reduce SG&A to 2.5bn.  Gives a profit of 2.5bn.
  • Direct-to-Consumer.  These are streaming subscription services: ESPN+, Hulu and Disney+.  I'll use the Dec 2019 results for this, because of Disney+'s rollout.  They have a 700m loss per quarter, annualise it to 2bn a year.   (The actual cash burn may be higher, due to their film amortisation, but there is no segmented cashflow.  Thats a problem for another day.  Just use -2bn for now.)
So we get a cash burn of 6bn a year.


With luck, they can last 12 to 18 months.  The main thing is the 18bn current receivables.

I guess if they run out of money they can always print some.

Friday, April 17, 2020


This stock is down 50%, and the company has a high market share in a stable industry.  But after looking, I don't plan to buy it anytime soon.  Its an interest rate play.

Computershare is an ASX-listed multinational who does paperwork and record keeping for companies.

Their main businesses are:

  • Register maintenance: Performs record keeping to maintain the shareholder registries for listed companies, allowing shareholders to be directly registered.  This is a niche activity that the companies do not want to perform themselves.  They have a high market share: A 2015 report gives them 77% of the Dow and 62% of the S&P500 companies, 58% of the ASX200, and 62% in Canada.
  • Record keeping for Corporate Actions (eg: dividends, stock splits, company mergers)
  • Business Services: Record keeping for various businesses: Mortgage Services (eg: debt management, customer servicing, property appraisal, IFRS 9 compliance), Tenancy Deposits, UK Voucher services (childcare vouchers), US Chapter 11 bankruptcy, Specialised Loan Services (distressed loan servicing - they do take some loan risk (p12))

These are really boring record-keeping jobs handling government regulation and paperwork.  Most should be stable, some may have a cycle (eg: mortgages, bankruptcy).

I became interested in them because of their high market share in the register maintenance business, and EBIDTA margins in the high 20s.  Morningstar gave them a narrow moat.  The key question now is: how cyclical are their earnings?

Cyclicality and Interest Rates

They say that most of their revenue is recurring:

Source: 2019 AGM (p12)

How did they perform in the GFC?  Between 2H08 and 2H09, revenue dropped 13%, but profit dropped 45%.  The stock price halved.

The main profit driver is interest rates.  Operating profit shot up in 2016 and 2017:

Due to higher interest rates:

Source: Fred economic data

This is confirmed by management:

Management estimates interest margin revenue at 100m in FY 2021 above.  I estimate thats a 120-150m  drop in operating earnings from FY2019 levels if rates stay at current levels  (1) (2) (3).  Thats an annual operating profit of 150-180m (USD 27-33c per share), all other things being equal.

Or a 150-170m drop if rates go to zero.  So an annual operating profit of 150-120m (USD 22-27c per share).

Part of the business is counter cyclical.  See the spike in 2009 Corporate Actions revenue below:

And bankruptcies.  The last bar in the chart is for 3 months - they had cases at the same rate as in the GFC!  Shit, this is chilling.  The only saving grace is the US bankruptcies are fast, and the companies may keep operating many without job losses.

So if the current recession is like 2008, they could have a spike in additional revenue/profits (assuming all costs are fixed) of 110m from capital raising (USD 20c/share in one year) and 100m from bankruptcies (USD 18c/share spread over 2 years).

It is hard to estimate the effects of the downturn on this business.  Management provides hints, but they give different numbers (eg: revenue, income) for different segments of the business which make it hard to reconcile.  

In April, management estimated a 20% drop in EPS for FY 2020.  Since FY2020 ends in June, thats a 20% drop for 3 months of the year!  So are we looking at a 80% drop for the entire year?  Or more, with operating leverage?

The Numbers

Balance sheet is OK.  800m current liabilities, against 500m cash.  Long Term debt around 1.9bn (includes leases).  420m in FY 2019 earnings. Finance costs were only 67m.   My guess is that they can survive without raising more capital, as the majority of their non-interest revenue is recurring.

But they are very operationally leveraged.  If all their costs are fixed, a 17% reduction in revenue takes their profits to zero.

A quick look at long-term cashflows.  The invest significantly, most years investing 20-50% of their CFO.  Most of that is on acquisitions - they are "serial acquirers":

Their long term business model seems to be to use the cashflows generated from the stable registry business to acquire related companies.  I can't tell whether these acquisitions have led to greater profits.  Because I can't back out the effects of interest rates from the profits.

Earnings are too variable to value this stock based on earnings.  I can't calculate a price at which I would catch a "falling knife".


I thought this was a simple company with a nice story.  But it turned out to be complex due to the high dependency on interest rates, different business segments, and the different numbers that management gives.

The key is interest rates.  The best way to play this is to wait till interest rates are expected to go up.  Thats a loooong way from now.  In the previous cycle this was 4Q2016, after Trump was elected and growth/inflation expectations stayed high for several years.

Would I buy this in the middle/end of a market crash as a high quality stock to hold in a recovery?  Probably not.  In the 2009 to 2015 recovery, it was up 100%.  But SPY rose a lot more.


They only report their financials twice a year.

Their end of financial year is end-June.

Wednesday, April 8, 2020


Defli is an Indonesian chocolate manufacturer and distributor listed on SGX.  They are by far the largest player, with over 40% market share.  75% of their revenue is from Indonesia, the rest from the Philippines.

The Industry and Competitors

An Oct 2019 DBS report covers this well:

  • Delfi's distribution is strong in rural areas ("General Trade"):
  • Distributors in General Trade are largely exclusive to Delfi, creating a moat.
  • The Modern Trade channel has been growing faster than General Trade, but has recently been slowed due to unhappiness.  New modern outlets can only be set up a certain distance from existing traditional outlets.
  • Delfi has the largest market share in Indonesia.  They mainly compete with Mayora in the value segment, while the global brands (Nestle, Cadbury, Mars) compete in the premium segment.
  • Indonesia has laws protecting local manufacturers: "Under the Ministry of Trade (MoT) Regulation amendment No. 56/2014 for traditional markets, shopping malls, and modern stores and outlets, at least 80% of sales must come from domestic products, and private labels may account for a maximum of 15% of SKUs."
  • Delfi's market share is around 10% in the Philippines.
This article says that Petra and Mayora have a combined market share of 80%.


Before starting, when looking at historical numbers, note that the company sold its cocoa ingredients division in 2013, but some effects can still be seen on the income statement up to 2015.  Where the results of both divisions - two very different businesses - are merged together.

Around 60-65% of revenue is COGS.  Selling and Administrative costs make up another 20%.  Leaving pre-tax operating margins at 8-9%.

So COGS has the largest impact on profits.  DBS Vickers estimates that cocoa/sugar/milk make up 30%/15%/15% of total costs respectively (p6).  These commodity prices were very low in 2015/16.  Gross margin has varied from 32 to 38.5%:

The other determinant of gross profit margin is the proportion of own-brand products sold:

Clean balance sheet with zero net debt and minimal operating leases (p6).

CFO swings around wildly, due to working capital.

CFO is usually more than CFI.

Inventories and receivables have been steadily rising, which is a bit of a worry:

  • In the 2018 and 2019, management stated that increased receivables are because of a greater proportion of sales to Modern Trade customers, who have longer settlement terms.
  • In 2018, the group changed to the direct shipment model, where they took over the distribution function form their regional distributors, to their Modern Trade customer.  This caused an increase in inventories
  • The spike in 2017 inventories was caused by "a Government-imposed transportation disruption which necessitated the deferment of some deliveries to January 2018."


If I buy this, I am paying SGD (or USD) to buy an asset in Rupiah (IDR).  And the company is operationally leveraged to IDR/USD exchange rate (product prices in IDR, costs in USD).

In the current part of the economic cycle, where there is a USD shortage, EMs like Indonesia are particularly vulnerable.  May be better to wait for a crisis first.


Good company starting to turnaround.  Good financials, has growth potential after the crisis is over, and seems to have a moat.  Valuation is reasonable, but not cheap yet.

With so many moving parts affecting their profitability (Indonesian consumer demand, exchange rates, raw material prices, proportion of own-brand products), its hard to know how to value it.  The stock price has been falling for 6 long years.  Would I be willing to catch a falling knife?  Maybe at a single digit PE ratio.  6 to 8 times earnings would be SGD 40 to 50c.  Without currency fluctuations.

A better way is to wait till this crisis is over, and EMs start to be back in favour again.  Indonesia is a dirt poor, politically unstable country and we don't know how bad things can get.  You need a different strategy when buying in a place like that. Wait till things are getting less worse - there will still be a lot of time to make money and ride the trend up.  Don't catch a falling knife in a rioting country.


Starting this year, they no longer report quarterly results.  Next results are for June 2020.

They paid a dividend of SGD 3.22 in 2019 (2.57c in 2018), with a 50% and 55% payout ratios respectively.  This is important, as a way of rewarding shareholders so that the share does not become a "value trap".  I could not find a dividend policy.

Monday, April 6, 2020

As an asset light online travel agency (OTA), is a good way to play the coming rebound in travel stocks.  It has the strongest business model of all the OTAs.  Main question is when to buy.

Business and Strategy

This is a well covered stock, other people can explain it better than me.

glowing presentation from Sean Stannard-Stockton (youtube link) (starts at 5:30). Key points below:

  • 89% of revenue is from 87% of revenue from hotels and alternative accommodation. 20% revenue comes from alternative accommodation (but more corporate managed, not individual homes like airbnb).  
  • Most revenue is from outside the US.
  • Booking's business is "selling travellers to hotels".
  • Global hotel chains (eg: IHG, Marriott) already have a direct relationship with customers (eg rewards points).  Boutique hotels don't have this, so they pay a higher proportion of revenue to OTAs.
  • Europe/Asia have a lower percentage of hotel chains than the US:

  • Even though branded hotels are growing faster, it will be a long time before they significantly rebalance the market, especially in Europe.  Most of's business is in Europe.
  • Google recently added google hotel search.  This greatly impacts OTAs that reply on organic (ie: free) search results.  Estimate that less of Booking's earnings come from organic search:
  • Over 50% of the's transactions come from people who went directly to the site.  The company have been saying this for 18 months.
  • Booking is about 1 year behind airbnb in the alternative accommodation segment.

Balance Sheet

As of Dec 2019:

  • 6.3bn cash
  • 5.4bn short term liabilities.  This includes ~1bn of debt.
  • 7.6bn LT debt, plus 0.5bn operating lease liabilities.  1bn of the LT debt is due in Sept 2021.  After that, March 2022.  These are convertible notes, assume no one will convert.
  • A long term US tax liability of 1bn which we assume they don't have to pay now.
  • Interest expenses were only 266m.
  • Also have a 2bn revolving credit facility, only 5m used
How long can they last without revenue?  Last year, largest expenses were advertising 5bn, personnel 2.2bn, sales 1bn, G&A and IT 1bn.  Plus interest 266m.  So they should easily get to 3bn cash operating costs.  Thats 9 months until their credit runs out.  I am 80% sure they can outlast the crisis.  Need to see their 1Q20 results to see how fast they can reduce costs.

This guy thinks it can last a year.

Competitors and Industry Dynamics

Direct competitors are CTrip and Expedia.  A good comparison of Expedia and Booking is here.  Booking leads in Europe.

Hotel chains (eg: Hyatt, IHG, Marriott) are both customers and potential competitors.

The Google Monster is a supplier and the most threatening potential competitor.  Ben Thomson covered it well, he believes that google operates as an aggregator (advertising and recommendation platform), providing a frictionless service with zero marginal costs.  They would not want to do an OTA's messy job in the real world, such as signing up new hotels, bookings and cancellations.  This guy makes the same point looking at Google's and Booking's staff numbers.  I agree, though Google may want a larger share of the pie.

Airbnb is the largest threat, moving into boutique hotels and B&Bs.  Airbnb has listed 24000 hotels (as of Mar 2018 - less than 1% of their total listings) - they said they will only handle boutique hotels, not chains.  Booking and Airbnb have continually argued over who has the larger alternative accommodation listing, though by the numbers they seem equal.

Interesting March 2018 podcast on competition in the industry between hotels, OTAs and Airbnb:

  • (at 5:45) Airbnb so far does not compete with hotels.  Their original plan was hotels would come under pressure on high occupancy nights (eg: convention in town).  But this did not seem to happen for corporate travellers.  A hotel's convenience and consistency do not compete with the unique experience of an airbnb.  Airbnb plus is trying to move into this space.
  • (at 10:00) Airbnb's soft branding is the offer of a distribution system and loyalty program to boutique hotels, but the properties don't have to change their unique identities or rebrand.  Smaller independent hotels may prefer it.  Airbnb charges 3-5%, OTAs can charge 15%.  This is a threat to Booking, Expedia, and possibly hotel chains.
  • (at 13:08) Airbnb vs OTAs: Airbnb wants to be a 'superbrand' offering everything for holidays.  Expedia already does this, Booking is transitioning to one.  All of Booking's accommodation is instantly bookable, and it does not charge guests a fee.  Airbnb has better user interface and brand.
  • (at 17:15) Booking has the best business model and the most to spend on search engine and advertising, compared to Expedia and Airbnb.  Possible acquisitions by Amazon or Google may change the landscape.

Other articles:

Its a fluid industry with murky boundaries.  Customers are competitors.  We do not know who the survivors will be.  Based on sales, profitability and market share, Booking is the winner so far.

Misc is well followed, every hedge fund manager and his dog owns it.

Interesting article on Booking's past growth in Europe.

Wednesday, April 1, 2020

Other stocks I've looked at

I looked at these stocks but rejected them.  Keep this list, in case the market drops for another few months.

  • Malaysia Airport Holdings Berhad: They are changing their regulatory model - right now - due end March.  Previously they were only responsible for operational capex, now they will be responsible for all capex.  A massive capex increase is expected, from 200-300m per year, to 2-3bn (p28).  Since the business model is changing, the we can't look at past financials.  At least need to see the new regulations first, but it would be difficult for me to judge.
  • Sydney Airport: Simple business, far too leveraged and expensive.   At AUD 5.30, its at 30X earnings, even excluding D&A, its at 20X.  Debt is around 10 or 11bn, against 1.1bn CFO.  Forget it.
  • Chr. Hansen: Fantastic business, they make bacteria used for yogurt/cheese, with a 70/50% global market share.  Still too expensive.  Growth has been slow in the past few years, would need to drop more than 50% to get a price of DKK 170 to be at 15X earnings.
  • InterContinental Exchange (ICE): Stock/commodity exchanges, with 50% operating margin.  Still too expensive, wait till it hits $36 to $60 (trailing PE of 12 to 20).
  • Segro REIT: Fast growing industrial REIT, mostly UK, some Europe.  Still expensive on an EPS basis, would need it to drop to at least 50% to GBX 370 at 15X earnings before looking.

Maybe worth buying now:

  • Berkshire Hathaway.  Good description of BH's business model by ValueInvestAsia.

Theres still a lot of expensive stocks out there. Markets are not cheap yet.