Disclaimer: the views and opinions expressed by this blogger does not necessarily reflect those of his employer and his colleagues and officemates.
As you may have known by now, Cebu Air, Inc., the operating company behind Cebu Pacific, is planning to proceed with its Initial Public Offering (IPO). As of today’s economic briefing, Cebu Air is looking at offering the shares at a price range of PHP110-135 per share. The indicative offer size is PHP32 billion, and 70% is intended to be offered internationally, while the remaining 30% will be offered domestically, which will be divided 2/3 in favor of Trading Participants, and 1/3 in favor of Local Small Investors.
If we will analyze the offering on a “Trailing” Price-Earnings (PE) Ratio standpoint, the equivalent PE of Cebu Air will be as follows:
| If trailing EPS is PHP7.38 per share, computed based on existing shares outstanding | If trailing EPS is PHP7.01 per share, computed by including the shares to be offered in the primary market | |
| Shares outstanding | 582,574,741 | 613,236,541 |
| Share Price is PHP110 | PE is 14.91x | PE is 15.69x |
| Share Price is PHP135 | PE is 18.29x | PE is 19.26x |
Based on today’s Bloomberg data, the Philippine Stock Exchange index trailing PE is 13.53x, and the “forward-looking” PE of the index is 15.3x. That means that on a forward looking standpoint, the lowest price in the range (estimated to be at PHP110) seems to be the only reasonable offer price for Cebu Air. But if we will based it on Trailing PE data, the range of share prices of Cebu Air, Inc. is ridiculously high.
Another consideration that makes this indicative offer price expensive is the fact that JG Summit is trading at 11-12x PE. Thus, another strategy to ride to the potential gain of Cebu Air is by buying the JG summit stocks instead.
However, if we will compare the above indicative PEs to the trailing PE of listed low cost carriers in the world, then Cebu Air’s indicative PE should be somewhere in the industry median.
| Low Cost Carriers | Trailing PE Ratio |
| Air Asia | 7.94x |
| Tiger Airways | 28.86x |
| Southwest Airlines | 26.22x |
| Easyjet | 16.67x |
| Ryanair | 20.36x |
| JetBlue Airways | 29.20x |
| WestJet Airlines | 18.65x |
| Virgin Blue Airlines | 28.21x |
| Vueling Airlines | 6.94x |
| Air Arabia | 10.83x |
| AVERAGE | 19.38x |
Moreover, there’s no question that on a fundamental standpoint, Cebu Air, Inc. is really a sound company with a very good position in its industry via its “low cost carrier” business model. It is currently the leader in terms of different performance metrics in the airline industry, not only against Philippine Airlines and local players, but also against the likes of Southeast Asian LCCs such as Air Asia, Jet Star and Tiger Airways. Below are some of the key statistics as of 2009.
Key Operational Statistics -Domestic Carriers (2009)
| Indicator | Cebu Pacific | Philippine Airlines | Air Philippines | Others | Total |
| Passengers | 7,135,374 | 6,047,045 | 408,863 | 1,056,368 | 14,647,650 |
| Market Share | 48.7% | 41.3% | 2.8% | 7.2% | 100% |
| Seats | 8,944,551 | 7,871,586 | 588,948 | 1,562,756 | 18,967,841 |
| Load Factor for Domestic Flights (Passenger / Seats) | 79.8% | 76.8% | 69.4% | 67.6% | 77.2% |
| No. of Destinations | 32 | 29 | 18 | 29 | 38 |
| Current Fleet Size (no. of Airplanes) | 29 | 45 | 10 | 15* | 96** |
Key Operational Statistics – LCCs in Southeast Asia (2009, except for Load Factor)
| Indicator | Cebu Pacific | AirAsia | JetStar | Tiger |
| Passengers carried (in thousands) | 8,756 | 14,253 | 10,696 | 3,167 |
| Average Load Factor 2008 | 78% | 72% | 76.4% | 79.5% |
| Current Fleet | 29 | 45 | 44 | 16 |
| Average Fleet Age | 2.5 | 3.2 | 4.0 | 2.4 |
| Revenue Passenger Kilometer (RPK, in millions) | 7,056 | 15,432 | 18,140 | 5,245 |
| Revenue per RPK (in US cents) | 7.18 | 6.24 | 11.57 | 5.11 |
| Available Seat Kilometer (ASK, in millions) | 9,368.6 | 21,977 | 23,430 | 6,459.5 |
| Cost per ASK (in US Cents) | 4.5 | 2.5 | 10.97 | 8.13 |
| Average Aircraft Utilization (in block hours per day) | 12.9 | 11.8 | 12.9 | |
| Revenue per passenger (in US Dollars) | 57.88 | 67.57 | 189.00 | 85.84 |
| Average Fare per passenger (in US Dollars) | 48.96 | 50.95 | 114.21 | 73.5 |
Another fundamental consideration for this offering is the fact that most low-cost carriers have positive operating margins, while traditional full service airlines like PAL have negative operating margins since the LCC-model became a very effective business strategy.
However, if you will be too conservative on the fundamental standpoint, it is worth noting that the airline industry is quite cyclical, not to mention too susceptible to different event risks (i.e. airport shutdown, labor issues, etc.)
Bottomline: Cebu Air, Inc’s range of share prices might be too pricey relative to the local market. However, it might be worth considering if Cebu Air decides to offer based on a share price of PHP110 per share. But for those who are risk-takers, this stock could serve as an opportunity to penetrate the stock market and take advantage of its bullish trend.
Hi! I’d like to begin my response by praising your hard work and effort on this blog site. It’s great how someone such as yourself is willing to put time and effort into sharing your views and opinions on Philippine investment banking. I think this would be a great place for young finance professionals such as ourselves to share thoughts and views and create some sort of a mini-investment banking community for aspiring I-bankers.
Anyway, I agree with your opinions above but would also like to share a few comments, if you will permit. As a starting point I would like to use the trailing EPS of CEB using existing shares outstanding, which based on your calculations is PhP 7.38. Since we are looking at trailing, or historical earnings, it might be best to use the shares outstanding at the time these earnings were recorded. By including shares to be offered in calculating the trailing EPS, future earnings when those shares are issued are not included, putting some downward bias on the number. Given the PhP 7.38 trailing EPS, PE range of the CEB offer is between 14.91x-18.29x. You have a good point in that an alternative way for an investor to gain exposure to CEB is through the parent company, JGS. Although CEB is being offered to the public, 65% is still being retained by JGS thus still providing exposure to CEB’s potential growth. However I think it must also be stated, as a corollary, that in investing in CEB through JGS you forego the pure-airline exposure and open up to exposure to the rest of the businesses in JGS’ business portfolio.
Lastly, regarding relative valuation, CEB may be a bit pricey relative to market PE which is currently at around 13.5x. However it must also be noted that this number is a weighted value of the PEs of the various companies in the index, which are involved in industries such as telecoms, banking, utilities, consumer goods, etc. Thus, the unique investment features (bad or good) of pure exposure to an airline company is not comparable.
On this line of thought, the more relevant relative valuation method is to compare CEB’s PE with its peers. And based on your analysis above, CEBs PE is somewhere in the middle among the PE range of its peers. And a slight premium can be expected for CEB given financial and operating performance relative to its peers.
I hope to hear your thoughts on these, please feel free to correct me. It would be great to hear the opinions of an astute finance professional such as yourself. I am here first and foremost to learn. Thanks!
PS I hope you don’t mind that I left my contact info blank. I would be quite embarrassed to be identified, especially if my views above are misguided. Kindly leave your feedback here instead. =D
By: Anonymous aspiring fellow I-banker on September 25, 2010
at 4:19 am
Hi! I would like to start out my response by praising you for your time and effort in this blog-site. It’s great that a young and aspiring finance professional expresses his views and opinions on the local I-banking scene. This site would be a great pre-cursor to sort of a mini-community for young finance professionals such as ourselves to share and discuss ideas and thoughts.
Anyway, I agree with your analysis above but would like to add a few comments of my own if you will permit. I’d like to start off by using CEB’s trailing EPS, using its existing shares outstanding, of PhP 7.38. I think it might be best to use this number as it reflects the actual earnings recorded for CEB’s outstanding shares. Since we are using historical TTM earnings, the shares outstanding during the time those earnings were recorded would follow consistency. Using historical TTM earnings and future shares outstanding would not include future earnings that will be recorded by those future shares outstanding, putting some downward bias on the Trailing EPS. That said, CEB’s PE range would be 14.91x-18.29x.
I agree with your alternative method of investing in the shares of the parent company, JGS, to gain exposure to CEB’s potential growth. After all, the public float of CEB is only 35% and 65% is being retained by JGS. However, as a corollary, I think it also must be stated that by gaining exposure to CEB in this method, the investor would also be foregoing the pure-airline play of CEB stock and would be exposed to the different businesses in JGS’ business portfolio.
On relative valuation, CEB may seem a bit pricey relative to market PE which is currently at around 13.5x. However it must also be put in mind that this number is a weighted value of the PEs of the various companies in the index, which are involved in industries such as telecoms, banking, utilities, energy, consumer goods, etc. Therefore the market PE would not necessarily be a comparable number to a pure-airline play stock such as CEB. It excludes the unique investment features (bad or good; as you said, airlines are cyclical) of a pure-airline company. That said, it might be best to value CEB to its peers, and based on your calculations, CEB’s PE range falls somewhere in the middle. And some premium can be justified for CEB stock considering its operating and financial performance relative to peers.
Hope to hear your feedback on this, I may be wrong in my line of thinking, so please feel free to correct me. I am, after all, here to learn. Thanks I-banker!
By: Young Professional on September 25, 2010
at 3:19 pm
/\ Hi there Mr. Young Professional. I would like to express my sincerest thanks for finding time to visit my underrated blog site. Thank you for giving me some points to consider vis-a-vis what I discussed.
Your points are well taken, but allow me to respond to your points:
1) on computing the PE and EPS including the new shares to be offered – indeed you are correct that “ideally”, computing a “trailing” EPS and PE should exclude the shares to be offered. However, the only reason why I presented an alternative computation including the shares to be offered is because people (i.e. prospective investors) who do not have the ability to project the future earnings of CEB who will eventually subscribe to the issue have no other useful data other than trailing Earnings per share. If they want to know the indicative value of what they are buying into without relying on projections, the only way to do that is to use trailing earnings using the shares outstanding inclusive of the shares to be offered.
Of course I have my own forward-looking PE projections (with an attempt not to annualize the 1st half net income, and with an attempt to capture CEB’s profit cycles), but despite my disclaimer that this blog is only for my own view, I’ve decided not to risk putting it here, haha.
2) on the pure-airline play – you are also correct on that, but that premise is pegged on the assumption that the “airline industry” stocks could provide some upside that cannot be captured by any other stock. I guess it depends on each investor. It’s just that, there are also investors (including myself) who counts fundamentals as part of the many other considerations. I guess what I’m trying to say is that if I have the money, as long as it will give me returns at my personal hurdle rate, then I’ll be happy and satisfied. At the end of the day, some people will have the mindset that they are not buying an airline company, but rather, a stock of an airline company.
3) on CEB’s pricing at a premium – I really have a stupid feeling that CEB will price it at the higher end (closer to PHP135), knowing the Gokongweis, haha.
On a personal note, since I have a vague idea of your identity, and I think I’ve encountered you personally and professionally, I like your idea of coming up with a small circle. Let me know how we could go about it.
By: i-banker on September 26, 2010
at 3:45 pm
[...] manifested the greatest intentional equity value decay I’ve ever seen. Unless we will include Cebu Air, Inc., which dropped by 36% since its IPO last year. However, the decay in value for the case of Cebu [...]
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at 9:52 pm