LETTER TO THE MSWG – Air Asia-Sime Darby’s LCCT @ Labu.
To: The CEO, MSWG,
Your statement that the above project could be inappropriate for Sime Darby (SD) is wrong and is actually a red-herring because Air Asia (AA) is the one who should not venture into it.
1) Why it benefits SD?
a) It is contributing the land which is now cheap agricultural land. Based on previous JVs involving a land owner and a non-land owner, the bulk of the actual construction cost (which you place at RM1.6bil) would be borne by the other party as SD would revalue its land contribution of 1,200 hectares as its share of the total input costs, including land cost.
b) More importantly, the land surrounding this project would have development potential and surely this would be the biggest benefit since it would increase SD’s balance sheet and revalued book value per share (from lowly valued agricultural land to high value industrial/commercial/residential land).
c) SD is not venturing into a business completely foreign to its core businesses. Its main business of plantations involves land use and it is only finding another way to generate income from its plantation land, i.e. by monetising its land assets quicker! Additionally, property development and investment is also an important income source for SD. A striking example of SD’s property business is that of UEP, previously Sime-UEP.
2) Why it does not benefit AA?
a) Subang LCCT would have been ideal for AA due to its proximity to KL and PJ. The airline which operates mainly short to medium haul flights does not need a very long runway. Most critically, it needs fast and cheap public transport links to KL and PJ as its primary profit driver is passenger volume and maximising capacity utilisation.
b) Why move from the new purpose-built current LCCT? Why not extend and expand the current LCCT instead of abandoning it for a new greenfield site FURTHER away from KL, likely to cause more travel inconvenience?
c) It has to pay for BOTH the revalued land cost and construction costs which would total at least RM 3billion more than case 2a) or 2b) above, and which it could better allocate for new aircraft and crew for expansion. Or spend on developing superior public transport terminals and links at Subang (then) or at the current LCCT.
CONCLUSION & RECOMMENDATION
Many astute analysts believe this project was ‘forced’ on AA for the benefit of SD, which has many important shareholders. EPF by virtue of its substantial shareholding in AA is one of the prime movers while MSWG is not focussing on the real/ pertinent issue of examining the corporate governance in and business impact on AA. A minority shareholder in SD will benefit while one in AA will not. Please identify the correct critical business issues if you want to remain credible to the investing public.
– Caesar
