Small Cap Value Report (7 Apr 2016) - FLYB, UBI
Good morning!
A slight misunderstanding has arisen over what is, and what isn't acceptable in the comments section after these reports. It's really just common sense, but for the avoidance of doubt, here is the memo.
Stockopedia is my sensible space. Other social media - arguably not so much. We don't mix the two.
As if my patience wasn't already wearing thin, Flybe has put out a trading update - that's usually a bird-strike for the share price.
Flybe (LON:FLYB)
Share price: 59.5p (down 7.1% today)
No. shares: 216.7m
Market cap: £128.9m
(at the time of writing, I hold a long position in this share)
Trading update - actually, it seems alright to me, with the key part being an in line update:
Results for the full year to March 2016 are anticipated to be in line with market expectations.
Various other details are given. The load factor of 68% seems low to me, down 2% on last year - possibly due to surplus planes being used for routes that probably wouldn't otherwise be operated. That's a lot of empty seats on an average flight - almost a third.
The terrorist attack in Paris gets a mention - although these days I don't think many people give any thought to terrorism - it's a risk when you get on a plane, same as many other risks that we face every day in life. If you're in the wrong place, at the wrong time, then that's that. It certainly won't stop me, or millions of other people from flying.
In fact, we're flying more than ever, due to lower fares:
Against the background of the highest level of market capacity growth for six years driven by low fuel prices, we continue to be disciplined in deploying our capacity, focusing investment on routes where airport partners provide cost mitigation and those which adhere strictly to our business model. We are also continuing to reduce unit cost, which provides margin resilience, as well as reviewing our capacity growth rate beyond this summer.
Note the strong balance sheet here, with cash (from customers paying up-front) considerably exceeding the market cap:
In March 2016, Flybe took ownership of three Q400 aircraft, previously on operating leases, for a cash consideration of USD34m. This is in line with Flybe's strategy of rebalancing its aircraft fleet away from reliance on operating leases and towards outright ownership which brings the associated margin uplift. Flybe's cash position remains strong with total cash of £171.3m at 31 March 2016.
Valuation - tricky one, as the share is always in turnaround status. This is wearing a bit thin now. The PER is over 20 on current year estimates, but drops to under 6 on next year's estimates. The trouble is, the company has tended to undershoot forecasts in the past, so we'll have to wait and see on this.
I'm fed up with it, but you can't let emotions drive business decisions, so I'll continue to hold. It's a lot of business for the money, in my view.
There's not much else in the way of results today, which is handy as I'm shortly heading into the City for a company meeting. Am trying to get round to meeting more management - as good management is so key to a business/share succeeding or not. Trouble is, it's completely subjective. Some management can appear brilliant giving powerpoint presentations, but are useless at running a business, and vice versa.
A few snippets before I head into town:
Ubisense (LON:UBI) - it's so annoying when companies release results or trading updates at any time other than the norm of 7am. Ubisense released results at 10:33am today. The figures are awful, and there's some really worrying stuff about the banking covenants:
The Group is required to meet certain financial criteria agreed as covenants for the bank loan as laid out in note 18 to the Financial Statements. The financial measures are regularly reviewed against covenant requirements to ensure the Group's obligations can be met.
The Group notified HSBC of a breach of the covenants relating to adjusted EBITDA as at 31 December 2015 and as at 31 March 2016, against which HSBC provided Reservation of Rights letters indicating that they do not intend to take further action.
With a covenant test based on a rolling 12 month adjusted EBITDA calculation, the Group anticipates further covenant breaches in the next 12 months until the full effect of the restructuring actions taken in 2015 are delivered and the disappointing results of 2015 no longer have an impact on the calculation. The Group is engaged in constructive discussions with HSBC on a multi-year repayment loan with business appropriate covenants as a replacement of this facility.
That's a very dicey position to be in.
It makes another Placing, probably at a deep discount, a racing certainty. Therefore why would anyone in their right mind buy the shares now?
My consistent scepticism about this company from c.200p, all the way down to 36p, has proven correct. This business needs to shed costs, and move into profit asap, as I think time is running short. Shareholders, and definitely not banks, will not continue funding losses forever.
EDIT: Many thanks to the reader who flagged up a subsequent announcement today about a discounted Placing at 25p per share. That's a nasty 30% discount to the share price of 36p, when I wrote the above section. As usual, private investors holding the stock get diluted. That's the way it goes with distressed fundraisings - the company can't hang about, or have the uncertainty of an Open Offer, it just has to dilute existing holders by issuing new, cheaper shares to whoever the broker lines up for the Placing.
I see that the share price has since fallen to 30.5p, down nearly 23% today. Private investors can only look on, in dismay. If they are so inclined, then investors in today's placing can flip the stock for an instant profit. Therefore the share price is likely to gravitate towards the 25p placing price.
So, a shambles really. However, when you run out of cash, it's all about survival. This situation perfectly highlights why I try to apply such strict balance sheet screening rules, so that I don't usually end up in situations like this.
Losses like this are easy to avoid - a few simple checks of the accounts, taking less than a minute of your time, can identify whether a company has sound finances or not. OR, let me do the work for you, and just read my reports every day, or search the archive here by ticker or company name.
Intermediate holding companies
The more I think about it, the more I feel that so-called "Value Creation Plans" are simply an elaborate form of theft. Company Directors are already paid lavish salaries, bonuses, other perks such as company cars & pension contributions which dwarf anything provided for other staff.
On top of this they are usually also "incentivised" with share options schemes which give them free, or cheap shares, just for doing their job.
Now the most grasping of the managerial class are also trying to typically steal 15% of the company from its shareholders, through a mechanism whereby an intermediate holding company is created, with 15% of its shares being hived off to management - with a fig leaf of performance targets, and delays of several years, being used to disguise what is straightforward theft.
I strongly urge all shareholders to vote against all such proposals, and do everything you can to sack all Directors and advisers who set up such schemes. They are morally wrong, and the perpetrators have no shame in my view. Totally despicable.
White collar crime comes in many forms, and at this rate I'll be voting for Jeremy Corbyn, and get some of these morally bankrupt people put in prison. It's long overdue.
On that bombshell, I have to fly. See you tomorrow.
Regards, Paul.
(usual disclaimers apply)
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66 comments
I wouldn't touch Flybe as an investment - the load factor of 68% pretty much tells you all you need to know. It's shocking.
Ryanair reported a load factor of 94% for March FWIW and an average of 92% for the same period as Flybe have reported here.
They are being hammered by the likes of Ryanair and Easyjet.
'Standards' please don't talk about standards. I couldn't give a flying fig what your beef is with Paul Scott, talk about it with him rather than clutter up Stocko.
Difficult to talk to someone who hides behind their "Safe place!" whilst simultaneously being overly offensive and aggressive elsewhere don't you think?
Communicate with him by other means if you have to. You don't think you might be overly offensive and aggressive here?
Having been away for a week I find it very disappointing to return to read some of the abusive language and personal vitriol being used on these boards.
Fangorn - please take this as an official warning that this kind of posting won't be tolerated. You've been a long time poster, but any more of this and we'll have to suspend your account.
Stockopedia is a safe place for civilised discourse. Anybody is free to critique and challenge anyone else's opinion and contrary opinion is welcome. But vitriol, personal attacks, swearing and general abusiveness is not.
Please keep it off this site. It's not what we're about, it lowers the tone, and nobody wants to read it.
Thread closed.
Fangorn, please just give it up, you are taking up space here that has nothing to do with Stockopedia.
Good post Paul. It reminds me of something technical trader John Piper said.
"If throwing bones in the air works, don't question it, just use it."
I suppose a key thing to think about on VCPs and LTIPs, is whether you're buying the shares as a long-term holding, where everything has to be right. Or, if you're seeing a trading opportunity to make shorter term money - nothing wrong with that - markets are highly inefficient in smaller caps.
As I said to a friend in the pub yesterday, I'm now far more open to investment approaches - if I can find an approach that works, then I'll keenly look into it. So at certain times, momentum works really well - something that I've learned from Stockopedia, having haughtily dismissed that approach out of hand previously.
Although when the economy turns down, you can't beat sound balance sheets, and value.
Other approaches work well at other times though. Let's explore all of them. Whatever works!
Regards, Paul.
I agree with most of that but there are certain companies I don't want to own shares in: Tobacco, Gold mines and Gambling are 3 I try to avoid. There are some other more grey areas. I know some people don't care as long as the shares go up.
Yes its a learning curve, I have learnt a lot in my short time here, momentum is one, I was always looking for value before which caused me to miss out on several good shares, momentum works but you have to watch it does not reverse.
Very much agree with paul about LTIPS, VCPs etc being tantamount to theft as the managerial class already
enjoy good salaries and perks. There is a crying need for a bargepole list so we can avoid these companies.
I sold out of vislink as the greed here was excessive
Hi garkum,
It's tricky though, over executive greed. After all, we're in this game to make money from shares, not to enjoy living on the moral high ground.
So I always have a real quandary, when I like a business, but think the Directors are too greedy. What to do? It's a tricky balancing act.
On balance, I think it's best to generally avoid companies where there are red flags such as Director greed. However, in some cases, if there's a compelling reason to invest, then it is better to just hold your nose and buy the shares anyway.
It's like with Vislink (LON:VLK) - I flagged in my report here on 22 Mar 2016 when the shares were 26.9p that there was probably a 20% gain to be had;
With the shares now at 34.75p, that was indeed a nice trade. I didn't partake personally, but hope that some readers did, and made some money.
Regards, Paul.
Yes its a difficult one, I thought Vislink (LON:VLK) were a good buy when around 26p but I don't like the management so I did not buy. My quick research a few months ago revealed that about 2/3 of companies have similar schemes or generous share options at nil or low price, less so on the AIM.
One I hold is Finsbury Food (LON:FIF), very generous Executive LTIP, 2 directors have over 7m shares in options at nil cost, each year they receive 2x their salaries in share options and their salaries are not low. Its good if these things are highlight because I have not seen it mentioned anywhere. IMImobile (LON:IMO) is even worse.
Hi Herbie,
yes i noticed the comfortable LTIP arrangements for the Finsbury Food directors which put me off investing in the company. If they feel its fine to pillage the company have they got the best interests of shareholders at heart? Thats the fundamental question for long-term investors like myself.
Fantastic discussion around Flybe (LON:FLYB) and specifically fuel hedging have reminded me why I subscribe to Stockopedia. Great contributions from all.
Have a good weekend!
Ben
Hi,
The fuel hedging issue is one of the reasons why Flybe (LON:FLYB) profits have been somewhat depressed - it takes time for more expensive fuel from previous hedges to work through. However, hedges only defer price changes, so cheaper fuel is & will continue flowing through as a greater proportion of FLYB's usage. Therefore profits should rise. It's one of the catalysts for the share price to rise over the next 1-2 years. Another potential catalyst is a bid approach. A bit like with HOME, Flybe is capable of being bid for by a rival, and use Flybe's own cash to finance the bulk of the deal. Then duplicated costs could be stripped out, and bingo, the acquirer has just grown significantly for basically zero cost.
As Flybe is mainly a regional airline, there isn't a lot of overlap with other airlines. As road & rail get more congested & expensive, there is a strong case for using regional airlines. My family often fly from Manchester to Bournemouth, as it's cheaper, and much quicker than going by rail. That would have been unthinkable just a few years ago, so I like this subsector of regional airline. Most of Flybe's routes don't have any other airline competition actually.
Obviously I've called FLYB wrong so far. That doesn't matter, as it's history. All that matters is where we are TODAY - is there upside on the share from the current price? I think there is, hence why I hold & may buy more possibly.
I find that if I apply a strong balance sheet filter before buying, that tends to screen out complete disasters. Hence the stocks that do go wrong, tend to recover. It takes several years sometimes for them to recover, but I don't mind being patient. Using this approach, I tend not to bank many losers. I just wait for them to recover.
Regards, Paul.
Further to my last point, another interesting point is WHY Flybe have been reporting their actions. I havent been through the reports, but have the other key airlines - Easyjet, Ryanair, Dart and Wizz Air - been doing the same, and if they have, how do they compare? If they have or they havent, what is the point Flybe trying to make?
I agree. It would be a very good idea having a box with a remuneration score and would help remuneration committees to visibly see how significantly they are already over the average and might start a trend to at least level salaries off rather than regular double digit increases.
of course it could have the opposite effect - greedy directors using it as another reason to increase their remuneration and options to the 'industry norm' to incentivise and retain them on fatter salaries.
Paul's analysis is of the highest quality.
With effective moderation, we're getting some rather good comment from the readers.
In the 29 years since my first stock purchase, I have owned stock in 2 airports and zero airlines. Flybe isn't tempting me to break the "no airlines stocks" rule.
For anyone who is interested in investing in Flybe:
1 I believe the low cost airline model involves increasing ticket prices as the plane fills up. Understanding how this is calculated could be very useful.
2 If the price v % seats filled formula could be cracked, it should be relatively simple to raise an Upwork contract for someone in Bangladesh to stick a consistent selection of fares into a spreadsheet every month, then over time you can build up a picture of how they are trading. In advance of any RNS.
Anyone contemplating a reasonable position size could afford to pay their offshore labour rather well.
However, does anyone know how the pricing calculations work ?
Interesting comments today.
If we can determine an unacceptable VCP as Carmensfella suggest, then Paul you could have a bargepole VCP list?!
On FLYB, Paul you suggest that terrorists will not put off travellers. I agree. But what it will do is delay bookings.... would you book months in advance to anywhere in Europe at present? So cashflow to the airline is deferred. Just as important, it impacts on their forward planning and with less certainty on route viability, will make their decisions on forward buying of fuel more difficult.
.
Isn't what matters that total remuneration is reasonable, rather than how it's paid? Non-obsfucated share based compensation seems fine as such. Any form of deferred pay is good for working capital!
Also being focused on the "how" rather than the "how much" is an incentive for the bad guys to work around any particular method becoming frowned upon ("you don't want me to have share options? I'll double my base salary then!") as can be seen in the response to bonus regulations in the banking industry.
Stocko could help by showing a panel with director yield (showing total pay to directors including option schemes divided by market cap) on the stock report. I'd love to have a way to filter out companies where director yield > earnings yield!
great post - please implement it Stocko
Paul
I have been watching - and sometimes investing in Flybe for years. Fortunately I did get out of the shares above 100p but I dont think I have ever made money on them. Here are my thoughts about the recent past and going forward. First the only time I could have made money on them, I was so annoyed that they had left us - in the Isle of Man - in the lurch that I took my eye off the ball. The new management did a great job - at capital raising. Hence the big slush fund they still have. Secondly, they always made a big thing about the efficiency of turbo props vs jets on short to medium journeys. Whatever advantage there was went out of the window when the price of fuel went through the floor. I have a side belief that most customers now expect the ease and comfort of the Boeing and Airbus jets, and turbo props are largely passe.(passay!) Thirdly, they have been squeezed by the more efficient and cheaper companies like Easyjet and probably Ryanair; even here in the Isle of Man they sold their slots at Gatwick to get £20m from Easyjet; they continued with Manchester and Liverpool, and added Stansted; they have been outflanked by Easyjet in Liverpool and Easyjet have given us a less convenient but much cheaper schedule to London Gatwick, Liverpool, Bristol. Even with their smaller planes, Flybe's sold seat %s are lamentable; one way of looking at them is that they have much potential; my way of looking at them is that they are lamentable and dont hold out much for improvement.. Fourthly, they have been unfortunate in that one of the side effects of the fall in the oil price is that their much heralded service between London City and Aberdeen has fallen apart given the redundancies in the North Sea. They expected so much, both in terms of real business and kudos from this and it hit them badly. Finally, they have been building an own label business with SAS. Hardly anyone makes money from own label or white label as it is called in this case.
Going forward, they are obviously not faced with the legacy issues, but they were only negatives. If Flybe is going to be improve, it needs to be more successful...if you get my drift. I just cannot see where the step change is going to come from when you are up against Easyjet, Ryanair, Dart, Wizz Air and a whole lot more - BA Regional or whatever it is called, plus all the Air Berlins, Norwegian, Swiss etc. No room at the inn, IMHO. Cant even see anyone wanting to take it over, even for the cash!
Does any of that make sense? Hope so, but not for current shareholders.
Paul on FLYB you talk about cash levels in the context of customers paying up front; at the interims of 30.9.15 cash was £179m and current deferred income(where -as per the notes- cash prepayment of tickets is booked) was £56m-ie not a major part of the cash figure. Not surprisingly at 31.3.15 -ie just before the peak summer season- deferred income was higher.
You were very quickly correct on UBI Paul. Just 7mins later another rns announced a £4.8m placing at 25p!
And yes, do please continue to post where ever and when ever.
I know this is veering o/t slightly but imho it's worth saying that I very much enjoy your rantings, iirc I was subjected to one from you back in the day when I was less than completely supportive of Pierce Casey at Fayrewood, the world of investment can be a little dull and staid so the more compartmentalised ranting the better I'm entertained. What I do appreciate is the more sober and on topic nature of this site so long May that continue.
On the subject of Flybe I think they are cheap but probably for a reason, aside from the rocky road to recovery from various self inflicted wounds there's also the possibility that oil prices will snap back quicker and harder than most expect. If you look at how much Capex has been sliced out over the last 2 years, overlay the rate of reservoir decline and the continuing increase in demand you've got a perfect storm in the making...and that is assuming the Middle East remains no worse than today.
Hedging will help but sentiment will kill airline shares if I'm right ..big if mind.
Keep up the good work Paul...and keep on entertaining on Twitter and elsewhere !
Personally I would be gutted if Paul stopped using Twitter, he has got a personality after all! I also don't understand the post above flagging "inconsistency" from Paul - so what? Why should any investor be consistent? He is allowed to change his opinion. And even if he made a mistake - so what? It happens. We should view this blog as a source of information to do with as we see fit, and that is it. Paul is making no promises to anyone, nor should he have to. I really hope Paul does not give up what I think is an unbelievably good service because of all this grief he gets - polite or otherwise. If he stops, we all lose. I am incredibly bored by the time wasting caused by all this negative comment. Let's just stick to commenting on the stock - as per the "play the ball not the man" comment above - bravo.
Couldn't agree more! Paul is only human and I like the fact that we can see his less formal side and deeper character. People should stop being so precious!
"Stockopedia is my sensible space. Other social media - arguably not so much".
Paul: It is difficult to read some of your postings elsewhere and somehow forget the image they have created when reading your postings here. I like, and have learned from, the sensible Paul....why not simply be sensible everywhere ? Or, as others have suggested, simply post here to avoid posts which clearly upset you elsewhere.
PAUL
I admire your patience. However haven't you just simply called FLYBE wrong? The assets and cash are there however the management don't appear to have necessary acumen (unlike yourself - Accountancy) to address the structural growth required to support a rising share price.
With the short-term top of 99p achieved last August a distant memory. FLYBE is once again falling towards May's 52 week lows of 52p. What in your opinion is going to prevent FLYBE's share price from heading lower? More importantly what do you consider must be done urgently by FLYBE's Executive Team to provide investors with a higher share price and some well needed cheer.
Kind regards Rupert
Looking back at my records, I got my fingers burnt on FLYBE 5 years ago! They've had 5 years to get it sorted out, I can't see it happening now.
I've tried to abide by a general rule of late which is that if I got burnt on a share in the past then I give it a wide berth in the future - there are THOUSANDS of companies quoted on the exchange... it's just the tiny (:-/) hurdle of identifying the good ones! I know this could potentially mean losing out on a few... but it will also save some heartache too I believe.
Oh, and another thing I thought about, I go on holidays quite a lot, and quite often it is fairly impulsive involving picking a new destination for me which has one of the cheapest prices at the time... and I have actually never flown with FlyBe primarily because they are always way more expensive than anyone else. Perhaps if they reduced prices more people would fly with them...? I think last year they also had a big advertising campaign, at least on radio... and judging by the figures that's not done much either!
"Stockopedia is my sensible space. Other social media - arguably not so much. We don't mix the two."
I am not sure what is stopping you from being sensible on all social media, or even ditching Twitter and ADVFN altogether. You will probably reduce the aggro you receive on here while having a lot more time to produce the SCVR reports -- all for the benefit of this site and its subscribers.
Also...
"I strongly urge all shareholders to vote against all such proposals, and do everything you can to sack all Directors and advisers who set up such schemes. They are morally wrong, and the perpetrators have no shame in my view. Totally despicable."
This does not seem to tally with what your wrote here:
http://www.stockopedia.com/content/small-cap-value...
Where essentially you were happy picking up shares where management appeared to have nicked 2% of the mkt cap.
So... how should us ordinary punters view what is acceptable for director bonuses, options etc, and where we have to be pragmatic...and how do we judge what is unacceptable and when we must huff and puff? Some clarity on this would be welcome.
I agree. I never understood the attraction of advfn, plus a recent response to a misinterpreted post by a respected and supportive poster here at Stockopedia could lead to accusation of hypocrisy in terms of forum etiquette.
It takes courage to be creative and to put it out there and to some extent all creatives open themselves up to criticism. It comes with the territory. However this community is very supportive and in my own experience here others have often stepped in on my behalf in the face of withering criticism.
We all get it wrong, we all make mistakes, we all get stressed but surely the mark of person is whether they can fess up and say sorry.
Peace and love
Phil
Hi TMFMayn,
I don't think you should do yourself down and class yourself as an ordinary punter given you were paid to research and recommend companies for so long ;)
I also don't think Paul has to provide the clarity you're asking for. If you see inconsistencies in his views, you still have to be the one to decide which opinion you agree with and what you'll do with your money, that's no one else's job.
The whole point of this is that it's just one person's pretty well informed, but not infallible, viewpoint. It's up to us all to then decide whether we agree, disagree etc.
Ta
Chris
Hi TMFMayn,
You asked "how should us ordinary punters view what is acceptable for director bonuses, options etc, and where we have to be pragmatic...and how do we judge what is unacceptable and when we must huff and puff?"
Surely the answer's in the question? We each need to take a view. We're all grown-ups. It will matter more to some than others - we're all free to choose. Why should Paul be expected to tell us what to think? He has set out the facts and given his view and the reasons for it.
By the way, I don't think huffing and puffing is the point. If a management team is unduly greedy, the first decision is not to buy the shares (or consider selling if you hold).
So... how should us ordinary punters view what is acceptable for director bonuses, options etc, and where we have to be pragmatic...and how do we judge what is unacceptable and when we must huff and puff? Some clarity on this would be welcome.:
TMFMayn
It is your lucky day.....ShareSoc have hired a remuneration expert and we are creating remuneration guidelines on behalf of all our serious investor members so that companies and their remuneration committees can be encouraged to follow them as closely as possible rather than spending ridiculous amounts of our shareholder funds employing remuneration consultants !
We will be launching them within the next week or so but members can get a sneak preview in advance of the official launch by viewing it here...
http://sharesoc.ning.com/xn/detail/6389471:Comment:37706
David
Hi Ben - happy to have a go but not claiming any higher intelligence.
It looks like the company buys at a price agreed today (or when they enter the hedge agreement) a proportion of their expected future fuel usage based on expected flight schedules. Hedging fuel costs is quite key as this is one of the largest and most volatile variable costs they face, compounded by the currency impact of fuel being priced in USD. The further out they go the less certain these schedules become - will the business grow or contract, will they add/cut routes etc. - so it is prudent to hedge less of their expected future fuel usage. (Being over hedged is as risky as being under hedged).
This is usually done on a rolling basis so as time moves forward they add to their hedges for future years. What you see with this schedule is the result of them adding new hedges over time such that the later years have been hedged at a lower cost due to the significantly lower price of present and future oil over the past couple of years. Most airlines set out similar analysis from time to time but direct comparison is tricky as a hedge profile for any company is constantly moving. Apples and oranges and all that.
I think we can infer from this that 1) they are aware of the risk of rising fuel prices and look to hedge the risk; 2) they have a tapering hedge profile in both amount and cost over the next three years; 3) they are probably paying a fair bit more than the spot price for fuel for the current year reflecting the fact that these hedges were entered into when prevailing oil prices were higher. This is the price of covering themselves against the risk of a spike in oil prices and also gives them a greater degree of certainty when deciding things such as future ticket prices etc.
Hopefully not too simplistic an overview.
Gus.
Thanks Gus.
That is a very comprehensive answer to my question and I'm definitely more knowledgeable as a result!
I wonder if there is some computer/mathematics wizz who works out a hedging strategy based on the numerous variables and who advises Flybe (LON:FLYB)
Thanks again.
Ben
You're welcome Ben (and PKA below).
I suspect they do have a quant somewhere in the Treasury function doing exactly this. In a previous life I used to work on the other side of the trade as a banker providing derivatives, FX etc., to help companies manage interest rate, FX and other risks.
From my experience I would make the observation that it is critical for the FD and wider BoD to make a point of understanding what is being done in their name. In particular, make sure the hedging tail isn't allowed to wag the corporate dog. Anyone with a very long memory might remember a few horror stories, inter alia, a company called Allied Lyons. Nice, conservative well run company. Had an aggressive young treasurer in the late 1980's running rings around senior management with increasingly complex risk management tools to the extent that the Treasury became one of the company's main source of profits. You can guess the rest - built up a portfolio of complex and misunderstood derivatives in the name of risk management and blew himself and quite a lot of shareholder value to smithereens. Still used as a business school case study I suspect.
An apparently "too smart" bright young thing in the Treasury has become a bit of a red flag to me these days. Shame that too many bankers see them as a business opportunity!
Best,
Gus.
Hi Gus,
I think that's a very good description of how airlines use the futures markets to hedge their fuel purchases. I believe that electricity companies use similar hedging strategies.
Also used for forward booking currency for firms which buy raw materials from overseas eg steel industry.
Hi Paul,
Any thoughts on Tower Resources (TRP) consolidating 250:1 making most PI's holdings absolutely worthless?
In my opinion, anyone who needs an additional incentive scheme to do a job to the best of their ability is not deserving of the job in the first place. Directors of listed companies nearly always have a good basic salary and pension and certainly earn enough to buy some shares in the market for their company, like the rest of us have to do. That should be incentive enough. Any more is just greed.
Hi all.
Could someone with more intelligence and knowledge than me look at the Flybe (LON:FLYB) hedge and translate them into something more understandable!
I'm not sure how to workout what they are paying and how this compares to their competitors. I see that the trend of the cost is good (I'm not that stupid..)
H1 2016/17 - 92% hedged at $590 per tonne
H2 2016/17 - 89% hedged at $539 per tonne
H1 2017/18 - 67% hedged at $473 per tonne
Help would be appreciated.
Thanks.
Ben
Bsharman,
Any form of hedging is a committment to buy or sell at a fixed price at a future date. You only know if the hedge has been benificial when the hedge matures and you can compare what you bought or sold for to the current open market price.
FLYBE don't appear to have been very clever hedging H1 2016/17 - 92% hedged at $590 per tonne. Available anywhere at under $400 in the spot market. Oh dear.
Fuel Prices
No position.
Bonitabeach
Hi Bonita,
The thing with this kind of hedging is not so much what happens to the price of the underlying commodity as how your company's hedged cost compares to the competition.
In simple terms, most international airlines operate in a reasonably closed system (there are alternatives to flying but they're not offering the same time/cost combination) and their load factors will depend on a number of variables, not least ticket cost. If all airlines are paying $590 per tonne for fuel at the moment because they are hedged in a similar manner, then none of them have a particular cost advantage even if the spot price is $400.
There is a fair bit of gaming between companies to try and gain an edge on the competition, but I think the effectiveness of this is marginal. I believe they all tend to adopt a broadly similar strategy with regards to buying their fuel forwards to give some sense of predictability on future costs. The risk to the airlines is not so much paying over the odds as paying up substantially more than the competition. To get an idea of how this effects Flybe (LON:FLYB), we would need to get a handle on their peer group's fuel purchasing profile.
Gus.
Hi Gus,
In general fast growing airlines have a lower % of fuel usage hedged, simply because it would be too risky to fully hedge capacity not yet in service. As a result Flybe probably are at a fuel cost disadvantage vs. Whizz, Ryanair and Easyjet IMHO.
Of course this could reverse if the oil price reverses ..
Very good point fhomboid1. So Flybe are likely to be at a disadvantage over the last 2 years and going forward for a while, because they certainly havent been growing fast, and in fact have been failing to make their growth forecasts.
I wonder how many VCP's you get on the main Small cap market vs AIM. I seem to remember Vislink doing it's VCP near straight after moving to AIM.
So is it just better to right off AIM as a complete barge pole job, and then the likes of VCPs become a non issue??
I've been checking AIM RNS's everyday for the last couple of years now and seing as 99% of them have something wrong with them or are resources stocks, you start to think what is the point in bothering with them as a long term investment.
99% is a slight exaggeration. There are lots of good companies on AIM, and there are good reasons to be on AIM vs. the main market.
The problem is that people are inexplicably drawn to the spivvy ones, and then generalise from there.
Expecting Value,
Edmund Shing nicely pointed out how bad AIM shares have done since it started here ;
http://www.stockopedia.com/content/why-do-punters-love-aim-so-much-mid-caps-are-so-much-better-86494/
It's hard to argue with the fact that you will be spending most of your day reading through crap with those shares. I'd rather spend my time focusing on quality than having a gamble and loading up on hundreds of AIM shares and hoping 60% turn out to be winners. I just don't get how one can sleep at night having a portfolio of mostly AIM shares and wondering when the next crash is gonna come.
I'd rather just check Paul's excellent reports than focus too much attention on them.
Flybe (LON:FLYB) Some broker comment on FT-ML.
Management’s swift move to scale back capacity growth in Q4 appears to have successfully defended the bottom line. However, dollar strength is a headwind for March 2017E and 2018E, despite hedging, and we have cut our forecasts by up to 26% to reflect this...
Liberum
More at http://ftalphaville.ft.com/marketslive/2016-04-07-...
''and at this rate I'll be voting for Jeremy Corbyn''
:)
It's no coincidence that Corbyn, Trump and the far right in France have gained popularity at the same time imho.
Maybe it's like - shit, what have we got to lose considering all we get these days is puppet yes men for the establishment. LOL
Corbyn is actually showing right wing policies although I doubt he means it. If we impose direct rule on British Virgin Islands and other British dependancies etc he is rebuilding the empire, rather that than Europe
On the subject of VCP's I agree. I feel them to be immoral.
We (as PIs) don't have many weapons with which to fight though. We can turn up at AGMs and cause mischief and we can vote against such things but neither will make much difference. Getting the institutions interested and supportive in terms of voting against hasn't worked to date (we've tried) either, possibly as their noses are in the trough as well.
The impact might however be felt if small investors collectively agreed not to buy or hold shares in companies that try this. Management would soon realise the role that small investors play in providing liquidity and supporting the share price. The trouble is, once the price started dropping, the various valuation metrics would start to look appealing and people (and insti's) would buy and the VCP would all be forgotten about.
You only have to look at VLK where there was heavy PI selling, partly in response to the crazy LTIP/VCP schemes in play there and after a bit when the price had fallen people started talking about how it was looking like good value and picking the shares up....
It's Tricksome McTricksome.
Alas I've not been reading over the past few days but find it disheartening that posters would resort to the shenanigans of not just discussing the merits or otherwise of a share as opposed to being vitriolic against an individual for having contrarien viewpoint.
I avoid the other BBs for that very reason and just frequent this site as it gives a more balanced perspective.
On the subject of blogging etiquette, you do not need a hundred rules but just one, mentioned I believe by simoan a few days back:
- play the ball, not the man
If we all stick to this, 99% of the nonsense I have seen in the past few days would disappear. It would be a shame if Stocko went down the route of well-known unsavoury BBs.
Ramridge,
We won't be going down the route of other unsavoury bulletin boards, don't worry. Management are on the case.
Regards, Paul.
Well done Paul.
I'm all for a zero tolerance policy towards rude and disruptive posts.
Deleting such posts & banning the members is the most efficient way.
Jeff
I sold FLYB at around 71 after the previous trading statement which I thought was a bit lacklustre.
Maybe part of the problem with FLYB is that the other airlines, particularly RYA and WIZZ, are doing comparatively very well, so in comparison FLYB looks uninviting...?
Hi andrea34l,
Yes that's true, but as with most things, isn't it reflected in the share price already?
Regards, Paul.
You may well be right Paul (you know tons more about the markets than I do), and perhaps I'd have agreed with that comment at 71... but now the price is down nearly 9% at 58.35 so perhaps the markets don't agree. Of course, in an ideal world, we'd have all sold at around 100-110 obeying our stop losses :-/
Have read the statement, to me it sounds like it's full of fluffy words which are meant to sound positive but don't really, "maintained", "agile", "mitigated" etc.
Hope you all make loads out of this... generally me selling my tiny holdings in anything points to future monstrous share price growth! :-)