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REX - Regional Express Holdings

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justjohn

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With all the fuss with Quantas lately our regional airline REX has taken off from $1 in September to todays high of $1.47 ,as usual was told about how good & efficent REX was and done nothing about it
 
Australia's largest regional airline REX is leading the way after dropping its fuel surcharge of $24 its also providing $1m in travel to assist local communities worst affected by the drought.this stock hit a high of $2.15 today :
 
I've been told the good people over at Rivkin & Co have suggested buying REX at around $2.00, currently sitting at $2.07, could be worth watching!
 
up 17% today to $2.80 report stating 25% earnings growth for next 12 months:asdf:with new routes to regional areas
 
Up 40% in a month, what a boat to miss. Meanwhile my other Rivkin recommendation of Westfield hasn't done much at all! Much less risky than REX though.
What do you think justjohn, has the REX boat alread sailed or could it still go up?
 
Kieran said:
Up 40% in a month, what a boat to miss. Meanwhile my other Rivkin recommendation of Westfield hasn't done much at all! Much less risky than REX though.
What do you think justjohn, has the REX boat alread sailed or could it still go up?
Click to expand...

I've just dipped into this stock, partly on Motley Fool recommendation. As there's been nothing on the boards lately, anyone have any opinion on their performance over the last year or so?
 
Despite having a rule never to invest in airlines, REX looks like a very attractive investment proposition. The reason I have a rule not to invest in airlines because, similar to the wine industry, the capital costs are high and the markets are too contestable, too much competition with low barriers to entry.

Is anyone here following or own REX? I want to look into REX further but a couple of questions I have off the top of my head are:

1) The yield is high ~7.5% yet the payout ratio (as a percentage of EPS) is quite low and has historically been less than 50%.

2) This makes me think about how much cash REX needs to retain for capital expenditure, renewal of aircraft. Do they primarily own their own aeroplanes or do they lease?

3) How much do they rely on fly-in/fly-out traffic and how much of this is attributable to the mining building boom and so how sustainable is that market segment?

4) To what degree does REX have a defensive comparative advantage? To what degree do the other airlines compete with them head-to-head on routes? If they aren't competing with them on their routes why not? Is there anything stopping them from contesting these routes?

If anyone has information of views on the above I would be interested to hear them.

PS: I've just looked at their earning history. Not so excited now - very lumpy and basically going nowhere except a little backwards over the past five or so years.
 
tinhat said:
1) The yield is high ~7.5% yet the payout ratio (as a percentage of EPS) is quite low and has historically been less than 50%.
Click to expand...

Yes, they do pay 7.5% according to last year's earnings. However, they have said their earnings will be 25-35% LOWER this year due to the carbon tax and other related costs.
That being said, the additional security checks that were initially introduced got scrapped, so that could save them some.

tinhat said:
2) This makes me think about how much cash REX needs to retain for capital expenditure, renewal of aircraft. Do they primarily own their own aeroplanes or do they lease?
Click to expand...

They primarily own their own aeroplanes, and have put a deposit on a few SAAB engines recently, which they still need to pay the remaining amount for. That being said, they're holding a HUGE amount of cash (an extra $30mil over previous years) in the case that they need to buy more and can't buy them with this year's profits.

This is VERY reflective of how conservative management is... (if you go through their presentations/reports, there's an obvious pattern of this) - I really like it.

tinhat said:
3) How much do they rely on fly-in/fly-out traffic and how much of this is attributable to the mining building boom and so how sustainable is that market segment?
Click to expand...

There are a few contracts with FIFO miners, but the majority of their income is not from this. I did look at this a while ago but I don't remember the exact figures...


Recently the NSW government 'renewed' their license to fly certain routes, and only to REX. While they have a monopoly on these routes, the company would prefer a free market (see their news articles on their investor center).
There are regulatory restrictions from them expanding into SOME other routes (I don't know them exactly), but REX have recently said that due to government taxes, they were considering stopping some of the less profitable routes (I personally think it was all talk).

tinhat said:
PS: I've just looked at their earning history. Not so excited now - very lumpy and basically going nowhere except a little backwards over the past five or so years.
Click to expand...

Yes, their earnings history isn't great, but if you take the lowest earnings of the last 6years, you're still at ~8*P/E, including an NTA that's about 1.4 times the share price.

That being said, it's worth checking these stats:
http://www.rex.com.au/OS/os.aspx?y=2012&site=IR

Based on those and the recent addition of taxes, I've held off on topping up (I bought in on the recent dip to $1.00 - got mine @ $1.03).

It is a low growth stock, but to be honest, it's priced at a very limited lifespan (trailing P/E < 6)... which, given the company's financials and operating stats, I don't see that happening anytime soon.
 
The thing you have to watch with REX is their staff costs. They are always having issues with staff turnover and not being able to source pilots with sufficient training (this is probably more concern when you fly REX rather than invest in it!). You can see it in how their labour costs have been consistently rising.

See here:

http://www.pprune.org/dg-p-reporting-points/443536-rex-eba.html

http://www.pprune.org/dg-p-reporting-points/495648-rex-importing-yank-pilots-2.html

http://www.pprune.org/dg-p-general-...02-mega-merged-rex-cadetship-working-rex.html

etc...

Airlines seem to always have these labour issues. Arrggghhh easier money elsewhere, IMHO.
 
McLovin said:
They are always having issues with staff turnover and not being able to source pilots with sufficient training
Click to expand...

Rex's problem over many years is that they train their pilots very well, better than most airlines. The pilots are then poached by major airlines to cut the costs of training their own and at salaries Rex can not match. A few years ago Rex had to cut back on routes because the majors poached a number of their pilots.

To overcome this problem, Rex started their own Pilot Training Academy . Pity the other airlines don't do as much training instead of simply poaching.

Cheers
Country Lad
 
Hi Tinhat,

I have owned REX shares in the past. The reason I purchased was due to the conservative attitude of the management and my personal view that the geography of Australia requires small regional airlines. Yes the earnings are lumpy but that goes with the type of business.

I sold out after 12 months or so for a small capital gain plus a nice dividend. The stock is too illiquid to fit in with my big bet portfolio. Not a "no-brainer" investment but then again with the conservative management I would not be surprised in the slightest that it is one of those stocks which provides an investor with a reasonable return when held over a few years.

Low profitability businesses can sometimes be a good investment - it is not like they are going to attract a lot of competition and can trundle along nicely. Research the discount to NTA trading history - do not rush to jump in.

Cheers

Oddson
 

And despite the academy they are still having to source pilots from the US. Considering the cost of sorting out 457 visas, one would have to assume the same problems remain.

I guess most pilots still see flying a jet for a major as a step up than flying a puddle jumper out in Wagga.
 

Airlines don't poach, never have and probably never will.
All that any airline does is advertise or as it always has been, they continuously accept applications from suitable applicants that meet their publicly published requirements and they keep a loaded file of applicants there that they can interview and test.
From that process they then keep a "hold" file of accepted new recruits who they call when it suits them.
That is what some refer to as poaching.

That's how it is and that is how it always has been from the minors to the majors, Qlink lose their experience to the likes of Virgin because there is no direct progression route from their regional to their mainline carrier.
Virgin etc lose their experience to Emirates and Etihad and other internationals, its how it works now and has always been.
A mate of mine has left Emirates and gone to Korean as a 747 Capt because of better pay and more trips home to Aust.

Regarding the comment about other airlines training, Qlink, Jetstar and Virgin all have cadet training programs running all the time !
 

Hi Oddson

I don't mind taking small holdings in small caps if I believe there is a good chance of stable dividends and reasonable prospects for capital preservation.

I've calculated the NTA values using the end of year balance sheets presented in the annual reports. Here is the data (I don't know any better way to present it here than using a screen shot - sorry):



The only thing I can observe from these figures is that pre-GFC The price was consistently higher than NTA and post-GFC it has been consistently lower. Am I missing something here? Please spell it out if I am because I'm not flash with figures which is why I have to pay to access analyst reports. Is this telling us something about the risk loading the market is putting on REX? (which would also account for the low PEs). Factors along the lines of McLovin's observations about the difficulty in retaining pilots? The potential for a larger airline to contest routes in the medium term?

This really has perked up my interest in getting to understand this business.View attachment rex price to nta.pdf

I've attached the figures as a pdf as well.

Thanks.
 

Hi Tinhat,

I will respond to you post with a question - with the risk factors that have been in mentioned in this thread do you think REX will ever trade at a premium to NTA?

Personally I do not think so - most investors do not like airlines and it is not going to grow into global enterprise. I do think the management is conservative and the airline wins awards (they must be doing something right!), but for an investment decision in REX purchasing at the right discount to NTA is very important. Pre-GFC is meaningless. Look at other companies valuations during that period. DYOR.

Cheers
 

I agree. The current price is a reflection of the earnings of the company which have more or less not not changed since 2007 despite the huge increase in NTA. There's a risk with using something like price/nta that unless the company is broken up/liquidated the gap may never close.
 
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