Pandemic risked CEB (Cebu Pacific) becoming a money pit for Gokongwei’s JG Summit Holdings

The airline industry faces significant challenges because of the unprecedented events brought by the COVID-19 pandemic. Travel restrictions imposed by various governments, both local and abroad, have led to abrupt reduction in passenger traffic and cast uncertainty over the near-term prospects of the industry.

In the 2Q20 where it did nothing much else, CEB incurred total operating expenses of 7.7 Billion Pesos.  In the second quarter of 2020 CEB burned cash of 6.2 Billion Pesos in its operation. With COVID-19 pandemic still raging, operations of CEB will continue to be limited. Presently, CEB disclosed that it is operating only about 15% of its pre-COVID 19 operations. At that operating level is unimaginable how CEB could be generating cash from operations.

The companies under Gokongwei’s flagship, JG Summit Holdings (JGS), have been doing well amidst the pandemic. JGS’s 55.25% owned subsidiary Universal Robina (URC) has been generating significant cash from operations. URC even took advantage of opportunities to buy assets from Roxas Holdings for 4.3 Billion Pesos. Robinsons Land (RLC), a 60.97% subsidiary, seemed secured with enough cash flows for its operational needs and payment of debts. Gokongwei’s other company Robinson Retail Holdings (RRHI) is also minting cash and is also in an acquisitive mood. RRHI acquired the 300-store Rose Pharmacy to boost its number of operating stores spending 4.5 Billion Pesos.  It is CEB that is heavily impacted by the effects of COVID-19 pandemic giving the top executives of the Gokongwei a tough challenge.

The effects of the pandemic had a material impact on the liquidity of CEB.  In the second quarter of 2020 it burned 6.2 Billion Pesos of cash in its operation.  At only 15% of its pre-COVID operations, CEB is mostly likely burning cash right now. Its cash balance of 9.7 Billion as of June 30, 2020 is nearing exhaustion by now.  The cash burn is just on operations, there are borrowings that need to be repaid and leases that need to be funded.

With liquidity under pressure, JGS and CEB initiate to recapitalize CEB by raising US$500 Million from US$250 Million convertible preferred shares through a stock rights offering and from USD$250 Million convertible bonds, warrants, or bonds with detachable warrants. JGS will be subscribing to its share of the stock rights and will be taking the unsubscribed rights effectively pouring in money to CEB.

The US$500 Million at current conversion will be worth around 24.2 Billion Pesos.  How far will that 24.2 Billion Pesos go? As of the end of first half of 2020, CEB has a total current liability of 42 Billion Pesos while current assets are only at 17 Billion Pesos leaving a net total current liability of 25 Billion Pesos. That net current liabilities of 25 Billion Pesos needs to be funded in the near-term.  The 24.2 Billion fundraising may just be gobbled up by near-term funding requirements.

The Gokongwei group may have to throw-in more money to CEB to help CEB stay in the air.  With no clear indication of when the pandemic will be under control, CEB will continue to burn cash and money must be thrown-in to help it stay in the air.  In good times CEB is a cow for the JGS group. But right now, CEB is fast becoming a money pit for the Gokongweis’ JG Summit Holdings.

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Disclaimer and Disclosure: This is an independent analysis for discussion purposes with the aim of giving stock traders and investors an independent viewpoint.  Accuretti Systems Inc. in day to day trading may have owned, or is considering buying or disposing, the shares of the companies mentioned in this commentary.

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