REX: Initial Analysis

At $100m they’re a little larger and more well-covered by analysts than I’d prefer. When I initially booked I thought they might be worth investigating a little more, and flying with them the other day cemented in my mind that there is no reason from a service point of view that someone would ever decide to not fly with them.

The initial glance over the financial statements left me with a mixed feeling. Passengers and therefore revenues have been shrinking, which is bad. They forewent paying a dividend last year, instead choosing to take that money and some additional debt and purchase some more capital, which I’d consider a push.

But one thing they currently have going for them is that they are somewhat a monopoly for the regional routes they run, so revenue from these routes should be somewhat guaranteed, and has a fair amount of potential upside if the market picks up again, with minimal potential downside (REX themselves push this angle, but the market picking up again soon is not a certainty).

Will continue to investigate but at the moment the story isn’t compelling enough to put down any money.

29/6/2015 Update: Looks like Qantas is doing low-cost regional in New Zealand under the Jetstar brand. This is a big threat for REX, because if Qantas can pull this off in New Zealand I guarantee you the next place they try it will be Australia. Maybe it’s worth speaking to REX investor centre to find out what would stop Qantas from doing this. The other option of course would be Qantas purchases REX outright. $100m would be pocket change for them. But I tend to think that they’d go it themselves, essentially forcing other low cost providers (Virgin etc) to buy REX if they wanted to compete this space.

Joshua Kennon outright refuses to consider airline stocks, and makes a fair argument against investing in them. And the Simply Wall Street screener sums them up as “Solid financial position but with no other noteworthy features.”

The other thing I need to find out is what does a used plane go for, and does their fleet and cash minus liabilities cover their entire market cap of the company. Simply Wall Street is giving them a Price to Book of 0.6, but I need to find out what exactly is behind these numbers.

Finally I want to check my gut feeling that the CEO is quite devoted to the firm and its return to greater profitability.


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