CORPORATE FINANCE ANALYSIS:

ROYAL JORDANIAN
Dania Mohammad, Hadil Mosa, Samah Almousa
Company Overview

EXECUTIVE SUMMARY

RJ’s capital amounted to 246,405,342 shares with a discount of JD 61 million on December 31,
2018. During the extraordinary meeting held on April 26, 2018, the General Assembly approved
the increase of RJ’s authorized capital by 28,205,128 shares to become 274,610,470 shares, in
continuation with the first half of the second phase of increasing RJ’s capital (JD 50 million).
The subscription process was completed in January 2019, whereby the authorized capital became
274,610,470 shares with a discount of JD 78,205,128. Thus RJ increased its capital by JD 150
million out of the JD 200 million, raising the shares of the Government Shareholdings’
Management Company to 78.82%.

COMPANY DESCRIPTION

Royal Jordanianis the flag carrier airline of Jordan with its head office in Amman - Jordan,
operating scheduled international services over four continents from its main base at Queen Alia
International Airport. Royal Jordanian is a member of the Arab Air Carriers Organization and the
Oneworld airline alliance. The airline operates over 500 flights per week, with at least 110 daily
departures and was formerly known as Alia Royal Jordanian Airlines. Established on the 9th
December 1963 and started operations on 15 December 1963 after a royal decree by the late
King Hussein. It was named Alia (or Aalya) after King Hussein's eldest child, Princess Alia bint
Al Hussein of Jordan (born on 13 February 1956), The airline was founded with capital from
private shareholders but the Jordanian government later took over the company.
CORPORATE(GOVERNANCE)

Management and OwnerShip

Board Members Information

Category Information

Number of Board Members 10

Average Age of Board Members 61

Average Years on Board 4 Years

Is the CEO the Chairman NO

Do they have an independent Audit & Comp YES

Committees

Table 1 : Board Member Information

RJ’s boards is largely independent – it has its own independent audit and compensation
committees ​“EY-Ernst & Young”​, The CEO is not on the Board and is not the Chairman, The
majority shareholder do have a seat on the board, Major shareholders are listed and explained in
the ​Stockholder Composition Section ​below, The average age of the Board is relatively high,
but with an acceptable years as a Board Member.

CEO Information and Compensations

RJ’s President and CEO Stefan Pichler, has been the CEO for RJ for 3 years with a MA degree
in Economics and Law, Mr.Stefan has been a CEO for 3 other Airline firms since 2009, which
makes him familiar and an expert in managing airline companies.
 Category Information

Annual Salary 424,510

Annual Remuneration 105,172

Travel Allowance (JD) 3,231

Total Annual Benefits 532,913

Table 2: CEO Compensations

Shares and Securities Owned by Board, Management and their Relatives

● The below table indicates the Board of Directors, their relatives and their shares in
2018

Board Member Shares Owned by them or Relatives

HE Said S. Darwazeh -

HE Basem K. Al-Salem -

HE Nasser S. Shraideh -

HE Sami Dawud -

HE Dr. Abdul Hakim Al Shibli 5,000

HE Capt. Suleiman R. Obeidat 3,406

HE Nizar Khoury -

HE Mr. Imad J. Al-Qudah -

HE Mr. Michael N. Nazzal 5,000

 HE Mr. “Mohammad Ali” Bdair 7,699

Table 3: Shares Owned by Board Members and their Relatives

● Securities owned by relatives of members of the Board of Directors by the end of

2018.

Board Member Relative Name Securities Owned by Relation

them or Relatives

HE Said S. Darwazeh Mazen S. Darwazeh 77,248 Brother

Table 4: Securities Owned by Board Members and their Relatives

● As for Shares Owned by Senior Executive Management:

There are no securities owned by either members of the Senior Executive Management or their
relatives during 2018.

RJ’s Financial Market

ASE Corporate Governance Source

According to ASE “Amman Stock Exchange” Royal Jordanian is listed under the Transportation
Industry alongside 8 other firms, RJ has a market rank of ​2​ with a number of ​274,610,470 ​listed
shares and an index of INDEX​ ​1574.10, 0.16%.

RJ is fairly comparable in terms of being watched in the market, with significant analyst
coverage and trading volume. RJ also has extensive investor relations pages on their websites
with unaudited financial statements available for viewing, press releases, and corporate
governance information.
RJ’s Social Responsibility

Since its establishment in 1963 as an emerging airline, RJ has taken upon itself to be an active
model that serves its community and contributes, alongside other national organizations, to
Jordan’s development and progress.RJ strongly believes in the principle of social responsibility
and the importance of positive interaction in the Jordanian community. RJ sees this possible
through active participation in various local events and activities.

Here are some projects RJ has taken and participated in 2018:

Social Responsibility 2018

- Renewing agreements to donate travel miles

- Donation boxes for cancer patients

- World Cancer Day activities

- Facilitating travel to Italy of 26 children from KHCC to participate in camp activities

- Supporting the “Think Pink” campaign

-Distribution of the symbolic pink ribbon

-Holding an informative, educational session

-Selling KHCF customized items

Table 5: RJ Social Responsibility Projects of 2018

 Stockholder Composition

STOCKHOLDER ANALYSIS

Investor Category Shareholders Securities

Individuals 16,253 15,463,576

Companies 41 243,757,013

Mutual Funds 3 718,711

Institutions 1 14,640,534

Organizations 2 5,829

Associations 1 5,775

Total 16,301 274,591,438

Table 6: RJ Breakdown of stockholders

Majority-Owned in RJ are Companies in terms of securities, and Individuals in terms of

Shareholders, who are well-diversified and thus able to diversify away any firm-specific risk.

Shareholder No. of shares % No. of shares 31.Dec %

31.Dec 2017 2018

Government Shareholding 88,243,117 60.3% 188,243,117 76.4%

Management Co.

Mint Trading Middle East LTD. 22,518,838 15.4% 22,518,838-+ 9.14%

Social Security Corporation 14,640,534 10.0% 14,640,534 5.9%

Table 7: RJ’s Marginal Investor in this Stock

The marginal investors at RJ are institutions. Two of them are local Jordanian and one of them is
British Virgin Islander, well-diversified and therefore unlikely to challenge management on
important positions.

Risk & Return

What is the risk profile of your company? (Overall risk, sources of risk,
changes over time)?

The company deals with various types of risks within a comprehensive risk management
framework in accordance with the best international standards, traditions and practices. Risk
management is carried out in cooperation between the Board of Directors and the Executive
Management.

Risk type Description

External Risks

Geographical Location Operations are held in Jordan and all departures are in Jordan, Which is
Risk surrounded with countries with high level of instability, which highley
effects RJ

Market Risk Lately, competition with other airlines has intensified in the Arab region,
particularly with the emergence of low-cost airlines.
 Credit Risk The company follows a clear credit policy in dealing with its sales agents
around the globe. This policy entails providing bank guarantees by the
agents in favor of the company. At present and in light of the existing
economic circumstances, the company is following up on the agents’
performance to protect its rights and avoid unforeseen situations that could
affect any of the agents and the company’s operations.

Fluctuation of Fuel Prices Fuel costs amounted to 19% of the total operational expenses during the
year 2016. Therefore, any material change in crude oil and jet fuel prices
can affect the operational results of the company substantially.

Fluctuations of Interest The company is exposed to fluctuations in interest rates when entering
Rates lease contracts and medium and long term loans to finance expansion
projects.

Fluctuations of Exchange The company is exposed to changes in the rates of exchange between the
Rates Jordanian Dinar and other currencies. Most of the company’s revenue
comes from ticket sales abroad and in the local currency of each country.

Internal Risks

Electronic Systems Risks RJ faces a new risk that has the capacity to adversely affect the electronic
systems used in the company’s operations.

Purchasing Risks The company purchases several types of raw materials and spare parts that
are necessary for the airline’s business. Any delay in supplying the
company with these materials or spare parts might interrupt the flow of
operations and consequently end up having big losses.

Table 8: RJ’s Risk

In order to calculate the risk of a company we should look at the measurement of beta using
RJ’s historical prices compared to the prices of the market:

Levered beta Unlevered beta

Year 1 1.32 1.10

Year 2 0.91 0.76

Year 3 0.96 0.80

Stock Perf Dividends:

RJ ASE Rel. Perf.

Year-to-Date -25.0% -13.3% -11.7%

1 Week -6.9% -2.0% -4.9%

1 Month N/A N/A N/A

1 Year -18.2% -13.3% -4.9%

3 Year -38.6% -27.3% -11.4%

5 Year -53.4% -27.3% -26.2%

Royal Jordanian is risky compared to its peers due to its lower risk score that investors look
at before investing in any company.
What return would you have earned investing in this company’s stock?
Would you have under or out performed the market? How much of the
performance can be attributed to management?

in order to calculate the returns for a stock and whether it is overvalued or undervalued is by
using the P/E Ratio.
The price-earnings ratio = Market value per share / Earnings per share
According to Amman stock exchange royal Jordanian has a P/E Ratio is around 7.13 and
according to the market average I would underperform the market

Company's name P/E ratio

JORDAN NATIONAL SHIPPING LINES 7.12

SALAM INTERNATIONAL TRANSPORT & 10.59

TRADING

JORDAN EXPRESS TOURIST TRANSPORT 10.87

JORDAN INVESTMENT & TRANSPORT CO. 20.22

MASAFAT FOR SPECIALISED TRANSPORT 7.22

COMPREHENSIVE MULTIPLE 3.96

TRANSPORTATIONS CO.

Average 10.00
Measuring Accounting Returns

Is there a typical project for this firm? If yes, what does it look like in terms of
life (long term or short term), investment needs and cash flow patterns?

Projects in progress 0

Short term Investments 0

Long term investments 23,647,000

Looking at RJs reports it shows that it hasn't had any projects from 2016, Previously RJ had
some projects of their own, building 3 subsidiaries: (Royal Wings, Royal Tours, Tikram).

The consolidated financial statements comprise the financial statements of Alia - The Royal
Jordanian Airlines Company (the Company) and the following subsidiaries (collectively referred
to as the “Group”) as at 31 December 2018.

How ​good are the projects​ that the company has on its books currently?

A good indicator of how good royal jordanian’s projects are, is their return on equity and return
on assets .
And as shown their returns on assets and equity have fallen down in the past 3 years, which
shows that their projects aren't good and they need to invest more.

Are the projects in the future likely to look like the projects in the past? Why or why not?

By looking at Royal Jordanians trend and return for the past years it looks like they faced a huge
fall in their investments and returns, their future projects will look like their past or even worse
by looking at the fall in returns and investments they went through the past year​.

Current Financing Mix & trade off on debt

Capital Structure

Financing in Royal Jordanian is varied between raising equity and decreasing their debts, raising
their equity by JOD 16,143 from year 2017 to 2018, and reducing their Debts as well by JOD
52,223 from year 2017 to 2018.

Benefits and Costs of Using Debt

At RJ, the use of debt would be a tool to increase management discipline; management doesn’t
hold much stock in the company.
And Debt is a way to decrease taxable income, hence reducing the tax amount paid.

As the report stated ​“No provision for income tax was calculated for the Company for the years
2018 and 2017, as deductible expenses exceeded taxable income in accordance with Jordanian
Income Tax Law No. (34) of 2014.”

Optimal Financing Mix

Optimal Capital Structure

In 2018 the Optimal Debt Ratio was listed as 0.68 , for RJ debt ratio is listed as 77.49

To actually calculate the Optimal Debt ratio and get a certain percentage to reach optimal, we
use WACC, but because we don't have Rj’s WACC we will not be able to identify the optimal
percentage range to get the optimal of 0.68.

Debt ratio RJ

Current 77.49

0%

10%

20%

30%

40%

50%

60%
 70%

80%

90%

Comparison to Industry and Market Averages

Rj has too much debt compared with the sector and the market, Since the difference between the
optimal RJ’s debt ratio has reached to ​76.81, ​which refers to the need for RJ to recalculate their
capital structure.

Moving to the Optimal

Because We do already have the optimal debt ratio ​(0.68) ​and the actual debt ratio is ​(77.49), ​RJ
will have to decrease debt number drastically, which they will be able to that by either:
1. Reducing debt financing in the current capital structure, by increasing Equity
percentage financing in the capital structure .
2. Stock buyback activity makes stocks more attractive in the eyes of investors
which will help increase equity financing.

RJ has already established several long term investments, with high debts and low level of
liquidity, which puts them in the situation for fast money (right now money), therefore they must
invest in ​Short Term Investments. ​But should keep in mind that this is a temporary solution
and long term investments should be in mind for the future.
RJ is a local Jordanian corporation therefore using the country's currency JOD, because their
main transactions are conducted using JOD, so this helps them run their workflow easily and
more profitably. The JOB is a fixed rate currency.