Cebu Pacific


CEB

Disclaimer

First of all, let me say that based on personal experience, I don’t like CEB (Cebu Pacific). I have taken several round-trip flights with them and in almost all cases, something went wrong. :p I actually still have a coupon for a free one-way ticket that I have absolutely no intention of using. Nevertheless though, they are one of the hotter stories in the Philippine Stock Exchange right now.

CEB pic

Here’s a very well written analysis that can be found online: http://www.alphainvestments.ph/is-cebu-air-truly-worth-php150/

Now, be honest, did you read the entire thing or did you just scroll to the bottom after you saw all the figures? :D

Just about the major weakness with this, as with many stock analyses, are with his growth rate assumptions. We can argue all day about those so let’s not go there.
Instead, let us focus on the major cost for CEB (Cebu Pacific) which is fuel and the practice of “hedging”

WHAT IS HEDGING?

Simply put, hedging refers to the practice of taking certain actions to minimize certain risks. In the case of CEB, this will normally concern their fuel expenses which, as per the report, accounts for a HUGE chunk of their costs. To be more specific, CEB has prepaid for about 40% of their fuel needs at a cost of under $60 a barrel.
This means that even if oil prices jump back up to $70 per barrel or more, CEB will only be paying $60 for up to 40% of their jet fuel. Nice right? :D
However, the flip side of that is if oil remains below $50 a barrel, CEB is still committed to pay $60 or so. Not so nice :(

WHAT TO DO THEN?

Personal feelings about their service aside, I believe CEB is worth taking a position in for the following additional reasons:

1. Strong dollar will make it cheaper for OFW-funded families to travel this coming summer. This will be greatly countered by CEB having to pay more pesos for their dollar liabilities so you will ultimately have to pick a side.

Me? I think the strong dollar will allow these OFW-funded families to pay for more “extras” during flights and those ancillary revenues will win out versus the higher dollar costs. After all, those snacks and drinks aren’t purchased in dollars.

2. We are heading into a National election. Campaign personnel and material for national positions will have to be ferried throughout the country and CEB is the leader in the domestic market. So, that additional activity also bodes well for them.

All in all, there really is only one thing that can derail CEB at this point: A horrifying crash.
FYI, Cebu Pacific is currently trading at below 90 pesos a share so depending on whose numbers you believe, you are looking at a gain of anywhere from 67% to over 100% in the coming year.

Aya Laraya

public seminar  ofw


Comments

  1. Rommel Ablin says

    Sir, I think you got the impact of strong dollar on CEB incorrectly. Dollar was weak in 2012 (around P2/USD peso appreciation) and CEB had P1.2b forex gain. Dollar was strong in 2013 (around P4/USD peso depreciation) and CEB incurred P2.1b of forex losses. PHP/USD rate was relatively steady in 2014 and forex gain/losses is not significant. But CEB incurred around P910m of forex loss in 3Q2014 when the forex rate move from P43.6/USD to P45.0/USD during the said quarter.

    • Aya Laraya says

      Hi Rommel,

      Thank you for your comment and yes, you are correct in that a strong dollar usually has a negative effect on CEB. The writer of the linked article also shares your point of view. The costs are usually associated with servicing of CEB’s dollar liabilities as well as the actual peso price of the fuel.

      However, I took the other side in that the strong dollar makes CEB’s prices even more attractive — both the tickets and the ancillary sources of revenue. The question therefore is whether the increased demand brought about by the cheaper prices and strong dollar will be enough to offset the higher costs.

      Admittedly, CEB’s past history, as you have correctly pointed out is not too good when it comes to this. However, during most of the periods you have pointed out, oil was significantly more expensive than it is today. This therefore limited CEB’s ability to adjust its prices. So, if you combine that inability with a stronger dollar, then CEB would definitely be in a bad position. But what if CEB could adjust its prices due to lower fuel costs? Since up to 60% of their fuel is potentially unhedged, this gives them greater leeway and flexibility regarding this matter.

      Once again, thank you for your comment. :)

      • Rommel Ablin says

        OK Sir Aya… I got your point (correctly if I’m wrong) that CEB may incur forex losses on strong dollar on strong dollar. But the strong dollar will provide strong purchasing power to Pinoys (OFW). The strong purchasing power and possibly lower ticket prices will result to much more revenue (volume-wise and on extras). These incremental revenue will more than offset the above forex loss.

        For me po, my take on CEB is that it will be not moved up higher than 110/sh this coming year or even in 1Q 2016. The lower oil price although not yet impacted the bottomline has already been factored in the current price when it surged from 70 to 85 in 4Q14.

        Factors affecting operations are forex risk (likely negative impact), market risk (20% revenue growth is a big challenge for me because of PAL, AirAsia and others) and commodity risk (comes in 4Q15, the prospect of higher oil price is more likely than of steady or lower price).

        Factors affecting the stock price. I think CEB is more exposed to foreign investors and it will always be compared to its peers. It would not move much UP unless there’s something special happening to its industry. Take these foreign investors out in the stock market for CEB and probably CEB might have a good chance to surge at 150/sh.

  2. Rommel Ablin says

    Hi Sir Aya, looking at the 1Q2015 results and re-checking 2014 financials, it seems P150/sh FV is a conservative fair value. I even factored possible risks and valued them… Time to buy…. hehehe

    • Rommel Ablin says

      Kalaban na lang nito is forex… if USD is lower than PhP46/USD by year end. earnings might be at estimated P6-7 billion…

      • Rommel Ablin says

        Since USDPHP is most likely end at around 47.00, the P6-7 billion might not be achieved due hedging and forex losses.

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