Disclaimer: All views and opinions expressed are solely my own and do not constitute official communication. Please do your own due diligence.
Since last year, many people have asked me if it's worth buying SIA. The share price of SIA has been depressed due to the COVID-19 circuit breaker, falling to S$4.39 and subsequently experiencing an 67% increase to S$7.32 at point of writing.
"It's a good buy," many people say. After all, it's Singapore's national airline, a source of pride for our country. We are almost certain that our government would not allow it to collapse, right?
Well, the answer is both yes and no.
I once thought the same way when I invested in SPH, but look at how it's performing now. In case you're not aware, SPH has been delisted since May 2022, and its shares have been redeemed in cash or converted to SK6U.
Anyway, let's delve deeper into Singapore Airlines!
Singapore Airline (C6L)
As a rule of thumb, seasoned investors like Warren Buffett are generally not fond of airline stocks.
Why is that?
Airline companies often lack a unique selling point, and their business models typically have weak or no economic moat. Furthermore, these stocks carry a high level of risk due to their susceptibility to factors such as (1) the economic outlook, (2) commodity pricing, and (3) intense competition.
However, Warren Buffett also acknowledges that there are opportunities in every crisis. Could the COVID-19 circuit breaker have presented an opportunity for investors to acquire shares in SIA?
Rights & MCB Issues (2020 and 2021)
Similar to many other airline companies, SIA carries a significant amount of debt due to the capital-intensive nature of its business. The COVID-19 pandemic exacerbated the situation, causing a drastic reduction of 96% in flight capacity and resulting in severe cash flow problems for the company. Ultimately, Temasek had to step in to rescue SIA from its financial distress. To ensure its survival, SIA increasingly relied on the debt markets to meet its cash flow requirements:
In 2020, SIA announced a offering to its shareholders, providing S$5.3 billion in new equity and offering another S$3.5 billion through a 10-year Mandatory Convertible Bonds (MCB).
In 2021, SIA once again proposed the issuance of a second tranche of MCB, aiming to raise approximately S$6.2 billion in additional liquidity for the company.
Source: SIA Presentation Slides
The consequence of this is that the rights issue will result in additional shareholder dilution, thereby reducing the earnings per share of the company.
Source: https://secure.fundsupermart.com/fsm/article/view/rcms208480/making-sense-of-the-singapore-airlines-rights-issue
The Singapore Airlines (SIA) Group has announced its plan to fully redeem the initial tranche of rights MCBs that were issued in 2020 in order to strengthen its balance sheet. The total accreted principal amount payable by SIA will be $3.86 billion. Additionally, SIA has committed to redeeming half of the convertible bonds issued in 2021, totaling $3.4 billion.
If any MCBs are not redeemed by the maturity date, they will be converted into ordinary shares at the conversion price of $4.84, resulting in dilution for existing shareholders.
The redemption of the 2020 MCBs and partial redemption of the 2021 MCBs aim to reduce the risk of potential dilution of shareholders, according to SIA. The MCBs are currently considered the most expensive financing tool, despite the prevailing rising interest rate environment. The initial yield-to-call is 4 percent per annum, compounded semi-annually, with subsequent step-ups to 5 percent and 6 percent prior to maturity.
What's up with SIA recently?
On 18 May 2023, it was reported that Singapore Airlines Ltd. will pay staff a bonus of around eight months’ salary after posting a record annual profit.
In response to the Covid-19 fallout, SIA Group made the decision to reduce its workforce by approximately 4,300 positions across its airlines. By considering measures such as a recruitment freeze, natural attrition, and voluntary departure schemes, the expected number of affected staff will be reduced to around 2,400 in both Singapore and overseas stations.
This decisive action by the company demonstrates strength and confidence, particularly considering the severe impact the pandemic has had on the airline industry. Many employees have experienced significant reductions in their earnings, especially those in frontline roles where incentives play a substantial part. With a reduction in flight capacity, these individuals have had to rely on their basic salary, which is often considerably lower.
On 28 June 2023, it was reported that SIA chief Goh Choon Phong’s total annual pay jumps 86% to $6.7 million
Trivia question: Prior to the COVID-19 pandemic, how much was the CEO of SIA paid, considering that he voluntarily took a 30% pay cut? (Answer: $5.1 million)
A quick industry analysis would reveal that even with this reduction, the CEO's salary places him among the highest-paid leaders in the industry, despite the relatively small size of our market.
Conclusion
Is SIA a worthwhile investment? Well, that ultimately depends on your level of conviction and risk tolerance. If you are an experienced trader, the impact of COVID-19 may present an authentic opportunity to trade this stock.
However, as an adherent of Warren Buffett's investment principles, I perceive investing as a long-term endeavor. I am not interested in the day-to-day volatility that often leaves retail investors feeling uncertain. Above all, my priority is to minimize the risk of financial loss.
Considering the cash flow instability and the distinctive characteristics of SIA's business model, I have concerns regarding potential stock dilution by 2030. Moreover, I am apprehensive about the accountability of the management team, particularly as the company continues to recover from the losses incurred during the global lockdown caused by COVID-19. The significant increase in employee benefits and dividend payouts, coupled with the simultaneous rise in overhead expenditure during this critical recovery phase, raises doubts about the effectiveness of SIA's management and its capacity to deliver long-term performance.
In the long run, airline companies generally do not serve as favorable investments. The risk-to-opportunity ratio tends to be unfavorable, resulting in significant opportunity costs. Personally, I prefer to avoid speculative investments, which is why this company does not make it onto my watchlist.
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