Aviation Related Stock, Revisit (Part III)

In Part II of this series (Read more here), the basic assumptions for post-Covid19 Monte Carlo model were illustrated.  Table 1 shows the summary of the inputs.

Table 1: Summary of Inputs

2020 EPS Estimation
EPS (RM)	0.28	0.18	0.08	-0.03	-0.15
Probability	15%	50%	30%	3%	2%
Recovery Pattern
Shape	V	U	L
Probability	38%	54%	8%
PE Range (2015 – 2020)
PE	10 – 23	7	30	Other
Probability	~ 50%	0.08%	0.08%	~ 50%
Floor Price
RM2.00 *

 *             This is the revised floor price.  In Part II, the floor price was set at RM3.29 (0.8 of tangible book value as at 31 Dec 2019 RM4.11).  The reason of change is that the lowest price to tangible book value of SAM was 0.619 in the past five years period.  By adding 20% additional discount to the lowest price to tangible book value, the revised floor price would be around RM2.00.

These inputs were fed into the Monte Carlo model.  Total 3000 cases were simulated.  The results of the simulation were plotted in Figure 1.  The snapshot (first 30 lines) of the Monte Carlo model could be found in Appendix 1.

Figure 1: Monte Carlo Forecast Heatmap

The average price for 2020 is between RM3.0 – RM3.5, 2021 could be around RM4.0 – RM4.5, 2022 could be around RM5.0 – RM5.5, while 2023 could improve to RM7.0 – RM7.5.

However, there is one significant difference between post-Covid19 and pre-Covid19 Monte Carlo model – the probability of Min value!

In ordinary Monte Carlo model, Min or Max value have very low probability of occurrence, normally less than 1%.  Meanwhile, in the post-Covid19 model, the floor value is fixed at RM2.0.  As such, any results that fall below RM2.0 will be reported as RM2.0.  The heatmap shows that in 2020, there are 50% chance that the price could go down to RM2.0 (or below).  As the model did not limit the Max value, thus there are 1% chance that it could hit RM8.0 – RM8.5 range in 2020.

Conclusion

The post-Covid19 Monte Carlo model shows that the average price for SAM is lower than pre-Covid19 model but could slowly recover back to pre-Covid19 level, depending on the development of Covid19.  The simulation results are based on the assumptions illustrated in this series of article (Part I, II, and III).  The assumptions are not final and must be adjusted frequently in order to reflect the volatile conditions.  Once the situation has become more stable, a final version of the model would be updated.

The probability heatmap of Monte Carlo model is an additional risk assessment tool to investors.  The closing price of SAM on 30-Apr-2020 was RM5.82.  At this level, risk averse investors might stay on the sidelines.  However, on the longer term perspective, the price could be viewed as neutral.

The purpose of this study is to illustrate the concept of constructing a post-Covid19 Monte Carlo model that could incorporate the impact of the pandemic.  It is not meant to provide any buy or sell recommendations.

Stay Safe!

Appendix 1 (First 30 lines of Monte Carlo Model, there are total 3000 lines)

Disclaimer:  The above analysis does not imply any buy or sell recommendation.  The author disclaims all liabilities arising from any use of the information contained in this article.

Disclosure: The author may have interest in the stocks of the companies in this article.