SIA Stock Review: Government-backed Equals Good Investment?
Updated: May 17, 2020
This post was originally written on 12 May but I made some changes to include a good point made by a reader. I encourage readers to comment freely whether you agree/disagree on certain areas of the post as long as it is constructive. We are all here to learn :)
I came across this article which prompted me to write about my thoughts on SIA.
Singapore Airlines (SGX: C6L) is one of the best airlines in the world and has established itself as a globally renowned brand.
Share price of SIA has dropped to a historical low of approximately $4.20 after ex-right. Any poor fella who had invested during its high late 2007 would clock a staggering return of almost -80% after holding for 12 years, excluding dividends of course.
Revenue and net income have been fairly flat over the past years. 2019 performance had only improved by a couple of percentage points over the previous year.
Free cash flow has been declining since 2017 due to increased capital expenditure on planes and spare parts. The decision of buying new planes is what I can't quite wrap my head around and SIA has kept the explanation brief. Even SIAS was thinking the same when they questioned the rationale behind SIA's intention of raising $15 billion. Still, SIA didn't divulge much in their official reply.
Personally, it is strangely optimistic for SIA to assume demands for air travel to pick up once this pandemic ends. Where did they find this confidence when nobody could estimate a time frame or how it would affect consumers behaviour. I doubt optimism is how anyone would want to navigate uncharted territories.
SIA, like most of the other stocks that I have covered in my blog, lacked diversification. As you can see, almost the entirety of its revenue originates from aviation. Now that the world has no choice but to take away the only one thing that airlines can do, revenue should be close to zero for at least another 2 quarters.
SIA has a significant amount of debt which they are unable to pay off because of travel bans as mentioned above. Hence, SIA initiated a rights issue and Mandatory Convertible Bonds (MCB) to raise cash and strengthen their balance sheet. Temasek had also shown their support by taking up any unsubscribed shares and MCB.
After ex-right, D/E ratio should go down from 0.7 to 0.5. For your info, the D/E ratio shown here is not the latest figure.
Fuel hedging, in short, is a method used by fuel hungry companies like SIA to reduce their exposure to fuel price fluctuations. It will help to lower their biggest expenditure and boost profits IF done correctly.
So how has SIA been doing in this matter so far?
Bad, to the point that we can ask what is going on. 9 out of 10 quarters, SIA had lost money hedging fuel. Statistically speaking, that is a 90% chance SIA will make a loss in fuel hedging. It was pretty annoying to compile this chart. SIA kept changing the usage of brackets for the category of "Fuel Hedging". Not sure what they're trying to do but have some consistencies man!
Keep in mind that net profit for Q3 19/20 is $315 million so the losses incurred here can be as much as 50% of profits.
Wait, that is not all. I haven't talked about Q4 19/20.
This was taken from their Q3 19/20 financial result:
Although, all the points covered in this post have been negative, I do enjoy flying SIA especially for business. In fact, I'm very happy that SIA is our national carrier and feel safe travelling with them. Unlike some airlines that would disappear while flying over some sea..
Not just myself who thinks positively of travelling with SIA, the increase in passengers carried is proof of that.
As for my experiences on flying with SIA, it has been pleasant so far. Maybe except that one time I was served food last for some reason even though I was seated in the middle of the cabin. Follow the order man! However, if I were to fork out my own money to fly SIA, I would have to probably think twice. There are other commercial airlines like Emirates or Thai Airways with great services as well who offers really competitive prices for the same destinations.
The main point here is that investors have to understand that operating an airline business isn't easy at all and not just because Temasek holds 50+% stake in SIA or it is of national importance. Singapore government bailed out SIA because . There are too many factors that cannot be overlooked and have to be balanced with each other.
How much revenue SIA can generate is highly dependent on the number of operational planes available. At the same time, carrying out thorough pre-flight checks to ensure the airworthiness of the plane, perform preventive maintenance that conforms with aviation regulations while balancing cost. Not forgetting the professional pilots and cabin crew making sure passengers onboard are snug and comfy. It is commendable that SIA is able to achieve all of the above and consistently rank as one of the top airlines in the world.
In the short term, there will be more pain coming up since this pandemic is far from over. Countries who were slowly easing social distancing find themselves caught up in second wave of COVID-19 so I highly doubt travel restrictions will be lifted anytime soon. On the bright side, this pandemic will weed out the weaker players thus creating more opportunities for SIA to capture bigger market share. All SIA has to do is "tahan" this out which shouldn't be too difficult since Singapore government has agreed to help out.
Nonetheless, I hope Temasek wouldn't go easy on SIA. Ask hard questions, bang some tables or knock some heads wherever necessary because it will become worse at this rate. Just check out SIAEC glassdoor reviews (SIA maintenance arm), there is ongoing dissent between technical staffs and management. Then, I see news of technical problems surfacing on SIA planes like here and here. It is very easy for me to relate the two.
So is SIA a good investment for retail investors at $4.40 per share? Unlikely as risks further outweigh rewards. The assumption SIA made here was that operations would resume by end of this year. If that doesn't happen, there might be another round of rights issue which will result in further share dilution. Nonetheless, it is a good investment for Singapore government because aviation contributes to 11.8% of GDP which is estimated by IATA to reach 20% GDP by 2035.
Well, what do I know? We are living in such crazy times. Good news, market goes up. Bad news, market also goes up. So invest at your own risk.
This post is getting too long so I would just briefly mention about KrisShop, KrisFlyer membership and KrisPay. I don't think they are good.
My 2 cents.
Disclaimer: The information listed here are strictly my personal opinion. It does not constitute as investment advice. Please do your own due diligence.
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