IPO ANALYTICS by Research and Innovation Lab GMG AIRLINES LTD. IPO Summary Company Background . Total Capital Raised (BDTmn) 9000 GMG Airlines Ltd was incorporated in Bangladesh on 6th May, 1998 Pre IPO Paid Up Capital (mn) 2467 Post IPO Paid Up Capital (mn) 3067 as Private Limited Company. It converted into Public limited Authorized Capital (mn) 5000 Company in 2010. Face Value 10 Offer Price (Tk) 150 In 2009 BEXIMCO acquired majority stake of the company. Credit Rating A3 Credit Rating Agency CRAB The company has 4 domestic & 8 International destinations. IPO Type Book Building Its registered office Located at near Dhaka airport. Issue Manager Janata Capital & Investment Ltd Production Capacity Utilization as of 2010 Fleet wise capacity proportion Fleet Capacity (passengers) Share-% BOEING 767- BOEING 767-300ER 260 57% 300ER MD 80 (82,83) 150 33% MD 80 (82,83) BOMBARDIER DASH 8 44 10% BOMBARDIER DASH 8 Fleet Lines Input Market - BOEING 767-300ER All the airecrafts are acquired from outside - MD 80 (82,83) Bangladesh - BOMBARDIER DASH 8 Output Market: Domestic International: - Dhaka - New Delhi - Saudi Arabia - Chittagong - Abu Dhabi - Kathmundu - Sylhet - Kolkata - Karachi - Jessore - Bankok Where will the IPO Proceeds Go? Loan Repayment Construction of 6% Working Capital Hanger 14% 6% Total 14% 14% 18% Balance 18% to be used for capital investment Around 67% 61% Payment to to be used for Paying Off Suppliers 61% Existing Bank Loan & Suppliers Industry and Market Facts BOEING 767-300ER, MD 80 (82,83) & BOMBARDIER DASH 8 The Substitute "AIRLINES INDUSTRY" + Gross Passenger Carring capacity is 454. But Biman has greater + No. of Airlines : Presently 4 capacity than others. + Sales Performance : 80% revenue comes from + Global Financial Crysis may decrease the visitors significantly. foreign airlines + Fluctuations in oil price may affect its performance adversely as + Market Leader : BIMAN fuel covers 34% on input costs. + Growth of BD MKT (Passengers): 66% + Still its not trated as a global brand. + Growth of BD MKT (Cargo): 15% + Rise in inflation reduces the purchase power & the money + Growth of Forreign Carriers (Passengers): 100% disbursement on leisure activities. + Growth of BD MKT (Cargo): 46.53% Analyst Note: GMG airlines holds poor capacity per fleet to satisfy the customers. The average no. of passengers per fleet is 150 persons whereas there exist a number of world class airlines like British Airways, Emirates which provide the capacity of 300-400 persons. Moreover some other facilities like fooding, extra spaces, churning is not in a good standard in comparison to other renowned airlines. So, it is not in the position of competitive advantage. Industry Dimensions Bergaining Power of Threat of New Entrance HIGH Buyers HIGH + Opportunity of Good Profitability + Very high due to high purchase power + Lack of Global Stanadrd airlines + Switching cost is very low for the Business Class customers for their high income INDUSTRY RIVALRY HIGH Bergaining Power of Threat of Substitutes HIGH Suppliers MODERATE + The number of private airlines is increasing + Availability of supplier globally at competitive due to high business potential price + Still BIMAN is the market leader & most reputed + There is no local supplier + Competition is increasing + Aircraft lease expense is high SWOT Assessment of GMG Airlines Limited Strength Weakness + GMG airlines is the first private airline in + Service quality is not Internationally standard Bangladesh, therefore it attracts some customers + Sitting Capacity is low Opportunities Threats +The market is oligopolistic & there is a huge + New companies are trying to enter the market. scope to increase the market share + Risk of aircraft damage & process malfuction As the first private airline in BD, GMG airlines has the scope to improve its performance & capacity to gain a huge market share & a long term reputation to make a threat for the competitors. Risk Factors: Analyst Note + In case of aircraft damage, any failure of commercially major flights will severly hamper GMG's long run prospect as the customer has more options & higher bergaining power. + GMG has no no automated worldwide reservation system. So, it burns the potential purchase orders. + Political & Industrial Unrest in Bangladesh are the grate risks for its business growth. + 47% Gross profit Margin indicates the premium pricing policy of the company. But in case of local routes, the higher ticket price may injure its sales potential seriously & customers can switch other airlines because of that. + Non Global standard of service will be a major cause of customer dissatisfaction in future. Management Capability Name of Directors Position Education Experience in Years Line of Experience Ahmed Shayan Chairman BBA, USA Not Mentioned Manufacturing Fazlur Rahman Shahab Sattar MD Not Mentioned Not Mentioned Aviation Ahmed Sharyer Director M.Sc, UK Not Mentioned Financial Market Osman Kaiser Director Chartered Accountant 28 Manufacturing Choudhury, FCA MD. Lutfar Rahman Director Not Mentioned Not Mentioned Financial Market Financial Performance 2006 2007 2008 2009 2010 HAVE A LOOK Turnover (BDT mn) 709 2467 3717 2,908 3,896 +Ve Gross Profit (BDT mn) 339 990 1760 1632 2543 Operating Profit (BDT mn) 52 138 79 647 1428 NPAT (BDT mn) 4 57 94 326 765 Sales Growth 77% Total Assets (BDT mn) 433 832 2686 4238 7491 Total Equity (BDT mn) -231 -174 327 1333 5785 Asset Growth 112% Return on Asset Ratio 1% 7% 3% 8% 10% Volatile Debt-Equity Ratio -2% -33% 29% 24% 13% Return on Equity Ratio indicates high degree of Debt to Equity Ratio -16% -26% 143% 54% 7% ROIC -2% -45% 12% 16% 12% financial risk Diluted EPS (BDT) 0.26 0.35 4.22 7.69 10.31 NAV/share (BDT) -2.33 -4.10 14.68 15.89 25.53 +Ve PE at Offer Price 576.92 428.57 35.55 19.51 14.55 Low Profitability (ROE, ROA, and ROIC) for Cash Flow Performance 2010 2009 2008 2007 2006 Cash to CL 86% 11% #DIV/0! #DIV/0! #DIV/0! Investors Critical Needs Coverage 88% 21% #DIV/0! #DIV/0! #DIV/0! NAV shows an abnormal Cash Interest Coverage 579% 93% #DIV/0! #DIV/0! #DIV/0! increasing trend Cash to Sales 28% 9% #DIV/0! #DIV/0! #DIV/0! Cash to Capital Employed 18% 12% #DIV/0! #DIV/0! #DIV/0! Dividend Payout 0% 0% #DIV/0! #DIV/0! #DIV/0! No Dividend History Moderate Cash Flow for Company Auditor S.F. Ahmed & Co. 2010-09 Analyst Notes + Accounting information is not fully available for 5 years view as per the prospectus. + Abnormal increase in sales & profits represents the possibility of earnings management exercise. + Return on Invested Capital (ROIC) remains at a dissatisfactory level compared to opportunity cost. + No dividend payout history is observed which is a bad news for equity investors + Cash Flow Variability is high and Operating Cash Flow stands at substantially low as percetage of sales in 2009 and as a measure of return on capital employed. This indicates poor financial health in terms of cash generation. + Due to unavilability of the financial information in the prospectus, the red coloured fields can't be evaluated. Additional Analyst Forensic Particulars 2010 2009 Accrual Ratio 28% 9% Cash Ratio 86% 11% Debt to Equity Ratio (BEXIMCO) 64% 65% Revaluation Reserve to Total R&S 30% 93% Share Price based on Peer group PE ratio 583 435 Analysts Notes: + 77% Sales Growth & 112% Asset Growth over last five years are abnormal. It can be decreased drastically when more companies are involved in this industry. So, the growth doesn't reflect the long term growth. + Though the acrrual ratio of 2010 has increased to three times than 2009, it ensures good cash generations. About 63% increase in Accounts Receivales & 61% increase in Advance,Deposits & Prepayments ensures higher Accrual inj 2010. + The information regarding the Management personnel is insufficient to evaluate their credentials. + According to the Annexure of Fixed Assets the mentioned aircrafts don't exist. The company says that it has acquired the aircrafts but wheather those are purchased or lease hold is not mentioned in the prospectus. + The cash ratio in 2013 shows the stronger capability to meet the current liabilities in 2010. But it has been abnormally increased from 2009 to 2010. + The Debt to Equity Ratio of BEXIMCO group indicates its higher financial risk. As BEXIMCO holds the majority stocks of GMG Airlines, there is a possibility to squeez money from IPO to settle the leverage of BEXIMCO Group ultimately. + The revaluation of the Aircrafts is suspicious because the Aircrafts has depriciation over the useful life. + There is no explanatory notes regarding preliminary expense write-off & Amortization of deffered revenue expenses though it covers Tk 13 mn as income. + Share price based on peer group PE ratio doesn't cover fundamental anlysis & covers mostly market sentiment. This valuation overstates the overall price discovery tremendouslyunder Book Building Method. So, the offer price is not rationale. RIL Rating Metrics Score Comment Management Capacity 0 Management has inadequate & irrelevant Experience Financial Performance 2 Moderate based on profitability, cash flows, Liquidity & solvancy Potential of Industry & Business Growth 2 Prospective industry Planned Use of IPO 1 Most of the money will go to pay bank loan & other liabilities Risk Assesment 1 Highly risky because of higher sensitiveness Average Score 1.2 Poor Graded for Investment Rating Bar: GMG Airlines Poor- 1 Below Avg-2 Average-3 Good-4 Very Good-5 All Data are sourced from the Prospectus of the company and RIL's own data bank. For Further Query on this issue or any other research call us at 09606555333 or email at:[email protected]. To download this report or know more about us please visit www.rclbd.co Disclaimer:This publication is produced by Research and Innovation Lab at Royal Capital Limited RCL) solely for the information of Clients of RCL.