Why Comair is taking government to court about R11.5billion in squandered taxpayer money
It just seems like all government run institutions are doomed to wasting money.
Eskom's latest wastage is R1.5 billion a year on hot meals for its employees. That's while it can't even get the R4 billion owed to it by 20 municipalities and the R8 billion it's owed by Soweto residents…
But today I'm not here to talk about Eskom. I'm sure you've heard enough about it in the news recently.
What I'd like to share with you is another story of government wastage - and a possible opportunity there could be in it for you.
R11.5 billion in tax payer money still isn’t enough to save SAA
In 2012 the South African government gave South African Airways (SAA) a R5 billion loan to ‘restructure’.
Since then SAA hasn’t done anything but burn through this cash. Its CEO resigned in April 2015 and received a ‘golden parachute’ to the tune of six months' worth of his salary amidst allegations of misconduct and nepotism.
And so, the minister of finance announced that government would give SAA another R6.5 billion in cash to try and keep afloat.
But this loan isn’t going down well…
It’s not just tax payers that aren’t happy with it either. You see, Comair which is in direct competition with SAA, is taking government to court about the loan!
Why Comair wants to put a stop to government’s squandering
If SAA just keeps getting a couple billion rand from government every year it doesn’t need to compete with private companies.
It can do what it wants and still manage to survive.
It’s thanks to this fact that both Nationwide Airlines and One Time Airlines went bankrupt. SAA stole their customers. But the thing is, SAA didn’t steal their customers thanks to great services and superior prices. SAA was actually running a loss-making business at the time. If it was a private company it would’ve gone bust.
The only reason SAA could put these other airlines out of business were because it had government money (that is, your taxes) backing it…
Now Comair's gone to court to try and stop government from just giving SAA money without any strings attached.
Comair wants to stop SAA from using the cash to un-competitively beat competitors out of the market.
Fine, if SAA uses the cash for a restructuring or turnaround strategy. But it’s downright wrong if SAA uses the money for marketing and selling cheap, loss-making tickets to passengers.
If Comair succeeds the investment opportunity could be massive!
As things stand Comair is super profitable. Comair is currently on a PE of only 8.84 – while internationally airliners are on PEs of DOUBLE that.
If Comair wins the court battle however and forces SAA to compete on equal grounds, things will change quickly.
SAA would probably lose more market share against Comair – purely because SAA is such a badly run, inefficient business.
And that would mean higher profit growth for Comair.
More profit growth flowing through to the bottom line of Comair is bound to catch investor attention. And this’ll certainly see a re-rating of the share to a higher PE, more on par with international markets.
Simply put the potential for Comair to double in share price is certainly there.
It’s a well-run business. It’s already making money and paying investors good dividends.
If Comair wins the battle against SAA, it could mean massive growth strides for the business.
This is certainly a situation I’m keeping my eyes open for…
Here’s to unleashing real value
Editor, Red Hot Penny Shares