This morning I stumbled upon something that raised more than one question. Regional Express Holdings Limited (ASX: REX) announced a trading halt pending a market announcement. The first question: what is a trading halt?
What is a Trading Halt?
A trading halt on the Australian Stock Exchange (ASX) occurs when the normal trading of a particular security or securities is temporarily suspended. The ASX impose a halt in response to certain events or circumstances that require immediate attention or clarification. Halting ensures fair and orderly trading and protects the interests of investors.
During a trading halt, no buying or selling of the affected securities can take place on the exchange. The ASX usually announce the halt and communicates it to market participants, including brokers, traders, and investors. The announcement provides details about the reason for the halt and the expected duration.
There are many reasons for a trading halt
Price-sensitive information: When a company possesses material information that could significantly impact its share price, a trading halt may be imposed until the information is properly disclosed. This allows all investors to have equal access to the information before making any trading decisions.
Market volatility: In situations of extreme market volatility or rapid price movements, the ASX may impose a halt to prevent disorderly trading conditions. This pause provides an opportunity for investors to gather information, reassess their positions, and stabilize the market.
Corporate actions: During significant corporate events such as mergers, acquisitions, spin-offs, or capital raisings, a trading halt may be enforced to ensure an orderly and fair process for all involved parties. This allows time for proper evaluation and execution of the corporate action.
Technical glitches: In case of technical issues or malfunctions with the trading systems, the ASX may implement a trading halt to address and resolve the problem. This pause helps protect investors from potential errors or inaccuracies that could occur during abnormal market conditions.
Regulatory investigations: If a regulatory authority, such as the Australian Securities and Investments Commission (ASIC), is investigating potential breaches of market rules or illegal activities, a trading halt might be introduced to maintain market integrity while the investigation takes place.
During a trading halt, ASX-listed companies are generally expected to provide timely updates and announcements regarding the reason for the halt and any relevant information to the market. Once the reason for the halt is resolved or the designated duration expires, trading in the affected securities resumes.
In summary, a trading halt on the Australian Stock Exchange is a temporary suspension of trading in a particular security or securities due to various reasons, such as the need to disclose price-sensitive information, market volatility, corporate actions, technical glitches, or regulatory investigations. The halt ensures fair and orderly trading and protects the interests of investors.
With that question answered, the next is:
Who are Rex?
Regional Express (Rex) is an Australian airline that focuses on serving regional areas within the country. Founded in 2002, it has become one of the largest independent regional airlines in Australia.
Rex operates flights to regional destinations across Australia. It primarily serves regional areas in New South Wales, South Australia, Victoria, Queensland, and Tasmania. Although it also offers limited services to major cities like Melbourne and Sydney.
Rex uses a type of aircraft called the Saab 340, which can carry around 30 passengers. These planes are reliable, efficient, and well-suited for regional flights. Joining their fleet at the end of this month, Rex have added 2 Boeing 737s to service higher capacity routes between Adelaide, Brisbane, Canberra, Gold Coast, Melbourne, and Sydney.
Rex offers both passenger and freight services. It provides in-flight refreshments for passengers and has a frequent flyer program called Rex Flyer.
As a regional airline, Rex aims to connect smaller communities and remote areas that are not well-served by larger airlines. It plays an important role in connecting regional Australians to essential services, medical facilities, business centres, and recreational destinations.
Rex prioritises safety and has a strong safety record. The airline follows strict safety standards and regulations to ensure the well-being of passengers and crew.
Rex actively engages with the communities it serves and supports regional development. It partners with local organisations, sponsors events, and contributes to regional initiatives to show its commitment to the regions it operates in.
Rex has recently expanded its operations to include flights between major cities like Melbourne, Sydney, and Brisbane. This move has increased competition in these popular domestic travel routes.
In summary, Regional Express (Rex) is an Australian airline that focuses on connecting regional areas within the country. Rex is known for reliable service, commitment to safety, and community involvement. By serving regional communities, Rex plays an important role in providing essential air services to remote areas and connecting regional Australians to necessary facilities and destinations.
What announcement could be so sensitive to need a Trading Halt?
A trading halt can come about for both good and bad news. Looking over the recent news Rex has had more than its fair share of both. We know they are starting new routes with new aircraft. For an airline, this can only be good news and we’ll be looking for an uptick in their share price.
On the other hand, Rex have been having some capacity problems since domestic travel opened up following the COVID lockdowns. Staff shortages have meant the airline has cancelled or rescheduled flights, causing them to miss their on-time performance (OTP) standards in some locations. Notably, on one flight, Rex rescheduled mid-flight missing Monkey Mia altogether leaving passengers stranded in Carnavon.
It’s possible that the above issues may be worthy of a price sensitive announcement, but for those with a long memeory; perhaps last year’s rumours of Virgin acquiring Rex have some merit.
To find out whether it may be true, let’s have a look at our own fundamental analysis and see whether we’d buy it.
Fundamental Analysis of REX
We have little data to work on a peer comparison. I have only added six companies to our – so far – experimental database as at today. But we can still look at Rex’s fundamentals on their own merits.
Profitability
Let’s start from the top down and look at their margins over the last ten years. Their Gross Margin (Revenue less CoGS) has been consistent over the years until lockdowns began in 2020. The cancellation of domestic travel hit Rex’s revenue hard, but they had the benefit of receiving some government subsidies and grants keeping their operations running. This is more pronounced in the Net Margin which includes operating and financing costs, as well as some tax benefits during the pandemic period. I think it’s fair to say that if we ignored the once in a lifetime event that is COVID, then we can see that they are a profitable company with potential to grow.
Management Effectiveness
Next we’ll take a look at their balance sheet, and see how the executive team have managed the group. To my eyes the first thing to stand out is the Debt to Equity Ratio. There is a very steep incline from 2020 through 2022. It sounds more alarming than it is, but this shows that Rex have borrowed heavily in the last two years. Some of this of course is to make up for the shortfall in revenue, but it appears more like Rex have been making hay while the sun shines, and expanding capacity into new routes ignored by the larger airlines.
Valuation
Rex is a relatively small company, so it is not a member of the S&P ASX indices that we track. Being small is not a bad thing. I just think it is important to note buy-and-hold index funds are not propping up their share price. This makes its shares a little less liquid, but at the same time a little more reflective of the underlying business. I will focus on the Price to Book Ratio here as this part really interests me. For the last ten years, the Price to Book Ratio has been less than one. Theoretically, I could buy the airline, liquidate it, and walk away with more money than I paid. Of course, that’s easier said than done, as most of the saleable assets of Rex get their value from being a part of a working airline.
Are the rumours true?
Now this is the part that makes me curious of the acquisition rumours. If Rex’s assets are only valuable to an airline, then who better to buy Rex than another airline?
I could write a whole new article on the duopoly of airlines in Australia. Many have entered, but always two survive (I don’t count Tiger as that’s part of Qantas). Remember Ansett, Compass, TAA, ANA, et. al.? I for one will be watching out for this announcement with great interest.
And if the rumours are not true, then it was nice to think about it for a day.
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