Tranmil- running on empty

In May 2008, Transmile Group Bhd ('Tranmil') announced its restructuring scheme which involved a debt-for-share swap of RM536.3 million. Tranmil will issue up to 243,818,000 new ordinary shares of RM1.00 each in TGB to its lenders [based on the proposed issue price of RM2.20 each] as settlement for borrowings totaling RM536.3 million comprising amount owing to the STL lenders (USD67.1 million), MTN holders (RM105 million) and CB holders (USD65.6 million) of the Group. For more, go here.

In April 2009, it was announced that the majority lenders have agreed in principle on the terms of the security sharing arrangement for the purpose of Tranmil group's debt restructuring. The lenders and Tranmil are finalizing the terms of the TGB group's debt restructuring. Last month, it was announced that that Tranmil is currently preparing the definitive agreements for the debt restructuring.

I believe some lenders are still reluctant to sign off on the agreements because they are being asked to accept a share worth about RM1.00 for every RM2.20 debt owing. This tantamount to taking a hair-cut of 55%. On June 6, the share price of Tranmil shot up above the RM1.00 mark & has been on a steady rise (see the chart below). This rise in the share price could help to seal the deal with those reluctant lenders.


Chart: Tranmil's daily chart as at 10/6/2009_4.50pm (Source: Quickcharts)

Assuming the restructuring can be completed in QE30/6/2009, then we can expect the following impact:
1) The increased in bank borrowings of RM56.8 million (from RM536.3 million when the Restructuring Scheme was announced to RM593.1 million as at 31/3/2009) consists mainly of accrued interest. This would be reversed & would result in a one-off profit (in the P&L account);
2) Bank borrowings totaling RM536.3 million will be "settled" while Shareholders' Funds would increase by the same amount (divided into increase in Share Capital of RM243.8 million & increase in Share Premium of RM292.6 million); and
3) From these, we can expect Current Ratio to improve from 0.3 times as at 31/3/2009 to 2.1 times. Gearing Ratio should drop to 'nil' as compared to 2.4 times as at 31/3/2009. NTA per share will improve from RM0.93 to RM1.52.



While the financial position would be stronger, Tranmil's bottom-line would likely to remain unchanged as a loss-making company until the existing, broken business model is replaced. Even the high NTA per share is not that comforting. As at 31/3/2009, Tranmil's Total Assets stood at RM934.7 million. Of this, 75% is contributed by Property, Plant & Equipment ('PPE'). 77% of PPE is contributed by Aircrafts (4 units of McDonnell Douglas MD-11 with average age of 17 years & 1 unit of Boeing 737 aged 34 year). The management has been trying unsuccessfully to sell off the 4 units of McDonnell Douglas MD-11 (which were valued at RM511.65 million as of 30/6/2008). The wide-bodied MD-11s do not fit into Tranmil's new business model, which relies more on narrow-bodied aircraft and customized air cargo services (go here).

Due to the sharp increase in aircraft orders beginning in 2006 and continuing through 2007, industrial source expects a capacity glut with supply exceeding demand by the 2011/2012 timeframe. This excess capacity will likely result in downward pressure on yields as well as the value of aircraft in the secondary market. This will make it very difficult for Tranmil to dispose off its MD-11s.

Based on the above, I believe that the share price of Tranmil is running ahead its fundamentals.

Note: When queried by Bursa, the Board of Directors of Tranmil replied that it was not unaware of corporate development or rumour, report or any other possible explanation to account for the unusual market activity on June 5.