Why I’m Not Buying Singapore Airlines Shares Even After Temasek Promised To Save It

Temasek is underwriting a massive rights offering that will provide Singapore Airlines with much needed capital. But here’s why I’m still not convinved.

Much ink has been spilt on the whole Singapore Airlines Ltd (SGX: C6L) fiasco. 

The latest news now is that Temasek, one of the Singapore government’s investment arms, has stepped in to provide our country’s flag carrier with much-needed capital. 

This comes as Singapore Airlines (SIA) is confronting liquidity problems due to its high debt load and fixed costs, and the disruption to its business because of the COVID-19 pandemic.

The rescue

In essence, Temasek, which currently owns around 55% of SIA, has underwritten a S$5.3 billion equity fundraising by the airline. Temasek has also underwritten a $9.7 billion issuance of mandatory convertible bonds (MCBs) by SIA; the MCBs will either be converted to shares in 10 years or redeemed before then. What this means is that Temasek will not only subscribe to all the rights and relevant bonds that it’s entitled to; it will also purchase any of the rights or bonds that other SIA shareholders do not want.

But despite Temasek coming in to save the day, I’m not interested in investing in SIA, even at these seemingly low prices.

How did it get into this situation in the first place?

Much like other airline companies, SIA is heavily leveraged due to the capital-intensive nature of its business. The high cost of replacing and upgrading SIA’s fleet has also led to negative free cash flow in four of the last five years.

To keep itself afloat, our flag carrier has been increasingly making use of the debt markets for its cash flow requirements. In fact, the company issued bonds to the public just last year to raise more capital. At the end of 2019, the airline had S$1.6 billion in cash, but S$7.7 billion in total debt.

The aviation industry is highly competitive too and the emergence of low-cost carriers have led to thinner margins for airlines.

The COVID-19 pandemic was the straw that broke the camel’s back as the significant loss of revenue (SIA recently cut 96% of its flight capacity) finally led to severe cash flow problems for the company and Temasek ultimately had to step in to save the day.

Temasek saving the day but shareholders will be diluted

Let’s be clear, this is not a government bailout. It is nothing like what the American airlines got from the US government, which included a massive grant. 

SIA’s situation is simply a major shareholder promising to back the company when it sells new shares to raise capital.

The new shares will dilute existing shareholders if they don’t take up the rights issue. On top of that, the mandatory convertible bonds will also dilute shareholders in 10 years when they are converted, unless they are redeemed before then.

SIA shares seem cheap but it really is not

Under the rights issue portion of SIA’s latest fundraising exercise, existing shareholders of the airline will be given the opportunity to buy three new shares at S$3 per share for every two shares they own.

Based on SIA’s current share price of S$6.03, I will get shares for an average price of S$4.21 each if I buy in today and subscribe to the rights issue. That seems cheap – but it really is not.

As of 31 December 2019, SIA had a net asset value per share of S$10.25. But that will drop substantially after the rights issue.

The rights issue will increase shareholders’ equity from S$12.1 billion to S$17.4 billion, or an increase of 43% from 31 December 2019. At the same time, the number of shares will increase from 1.2 billion to 3 billion. After the dilution, the net asset value per share will fall to around S$5.80 per share based on SIA’s last reported financials.

I also expect SIA’s net asset value per share to fall even more than that because of the heavy losses suffered as a result of the COVID-19 pandemic.

In the quarter ended 31 December 2019, Singapore Airlines incurred about S$800 million in staff costs, S$210 million in aircraft maintenance expenses, and S$522 million in depreciation. Most of these fixed costs will likely still need to be accounted for during the period of near-zero flights, despite SIA grounding its planes. These costs add up to around S$0.50 per share per quarter.

Together with the upcoming dilution and the heavy losses, Singapore Airlines’ shares could have a net asset value of close to or even less than S$5.30 per share in the future, depending on how long the pandemic lasts.

Earnings per share dilution

Earnings per share will also fall after the issuance of new shares because of the rights issue. SIA reported trailing 12 months profit of S$765 million.

Even if our flag carrier can achieve similar profit after the whole pandemic passes, its earnings per share will drop substantially because of the larger number of outstanding shares.

By my calculation, normalised earnings per share will decline from S$0.63 to just S$0.25 after the rights issue.

I’m not buying shares just yet…

The injection of cash will put SIA in a much better financial position but I’m still not convinced. 

Even if I buy shares today and subscribe to all my allotted shares in the rights issue, I don’t think I’ll be getting that great of a deal. I’ll be paying an average price of around S$4.21 per share, which translates to only a small discount to my calculated adjusted net asset value per share. It is also slightly more than 16 times SIA’s normalised earnings post-rights issue, which is not that cheap.

Moreover, if SIA is unable to redeem the mandatory convertible bonds before they get converted in 10 years time, they will potentially lead to further dilution to shareholders.

Let’s not forget too that our flag carrier (1) has a history of inconsistent free cash flow, (2) operates in an industry that is a slave to fuel prices, and (3) has strong competition from low-cost carriers. 

Given all these, despite the seemingly low share price, I still don’t think Singapore Airlines shares are cheap enough for my liking.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

35 thoughts on “Why I’m Not Buying Singapore Airlines Shares Even After Temasek Promised To Save It”

  1. Excellent analysis and write-up. Much appreciate your passion to educate simple minded Singaporeans, like me.

    1. Thank you so much for the kind words, Sonny. Really glad it was useful!

      Feedback like this is what keeps us going!:)

      1. Hi Jeremy,
        I really appreciate your informations,
        I have 8000 SIA shares purchased @10.863 ( since 2011)
        I wish to sell my Rights issues
        How much I can recover after selling off my Rights when It starts trading ?
        Please give me some advice
        Look forward for your useful informative analysis.
        Thank you
        From Lily

        1. Hi Lily,

          Glad you stumbled on our blog and thanks for sharing your situation.

          There are a lot of factors that can affect the price of your rights:
          1. How much do market participants think SIA’s shares will be worth after the dilution. I’m guessing it could be around the effective share price of $4.31 based on SIA’s current share price (Calculation works like this: [current share price X 2 +(rights issue price) x3 ]/5). SIA’s share price at that time will also affect the effective share price.
          2. Supposing SIA’s share price remains the same as today, those who buy into the rights issue at $3 will be able to profit $1.31 after the dilution. ($4.31-$3)
          3. But I believe that SIA rights will trade at a discount to its possible calculated profit. So in the above scenario, each rights issue will probably trade for a little less than $1.31.
          4. In your case, since you own 8000 shares of SIA, you will be entitled to 12,000 rights shares. Each of them will sell for less than $1.31 based on current share prices.

          Hope that helps! If you need more explanation with the calculation, feel free to email Ser Jing and me at thegoodinvestors@gmail.com.

  2. Very helpful, useful and well informative analysis!

    Look forward for more write-up.

    Thank you so much Jeremy. Keep going!

    Cheers!
    Quenda

    1. Thanks Quendalina,

      My blogging partner, Ser Jing, will be posting another article on the breakdown of the numbers of the rights issue and the mandatory convertible bonds. So stay tuned…

      Cheers!

        1. Hello Oliver! If you’re referring to me (Ser Jing), then yes – I used to work for The Motley Fool Singapore. Jeremy was also a writer for The Motley Fool Singapore before its closure.

          Cheers,
          Ser Jing

  3. Article with great insights! Thank you for sharing. New comer here wanted to go into shares and save up for children uni fee.

  5. You might have written a brilliant analysis to educate your readers on why they should not be investing in SIA shares. But are you and your partner even Singaporean at heart? This is our national carrier you are talking about. Why do you only expect our government to bail SIA out? When it comes to the crunch, which airline do you expect to fly Singaporeans home safely when all other airlines will not because the flight is not financially viable?
    For me I will buy SIA shares by using my hard earned savings, even if I can only afford 2000 shares, and even if it will not deliver the earnings per share you clever investers must get in return. Its a drop in the ocean, but if all Singaporeans rally around SIA, what a difference it will make. My friend, you cannot always measure everything in dollars and cents.

    1. Hi MC,

      Thanks for your comment. I wrote the article purely from the perspective of risk-reward and investment returns.

      But as a Singaporean, I absolutely agree with you and am proud of what our flag carrier has done to lift the name of our country. To me, it is the best airlines in the world, in terms of quality of service.

      I also agree that there are potentially many reasons that people invest- (1) for financial reward, (2) to support companies that are changing the world or (3) for sentimental reasons.

      So I applaud investors, such as yourself, who can afford it to invest in Singapore Airlines and to support the staff and their families. I think it is a great cause!

      1. I used to give lots of weight to fundamental analysis (and still do to an extent) but having been in the market for many years, all I will say is you are missing out on an incredible opportunity if you do not invest:

        (1) Market is way forward looking than you think;
        (2) You can average in – either down or up;
        (3) In the current environment, it’s Safety First – we know SIA will not go under given Singapore is SIA and SIA is Singapore (in a way…) and our government is filthy rich (probably $2T in total reserves). If you are a long term investor, you will look back one day and rue why you didn’t invest.

        So I hope you are writing but an academic piece and wish you all the best in investing.

    2. Hello MC!

      Thanks for sharing your thoughts! Jeremy was writing about SIA merely from an investing angle, like he mentioned in his response to your comment. I agree with everything Jeremy said in his response *and* in his article. We just have to be clear about our objectives with every decision we make with our money – whether it’s for an investment return, or for other reasons.

      I applaud your decision, and agree wholeheartedly with you that we cannot always measure everything in dollars and cents. Thanks again for sharing your thoughts.

      Cheers,
      Ser Jing

  6. I am a Singaporean and am very proud of what SIA has done for our country and people. I have urged all my friends to come up with whatever they can afford to lose and pick up SIA shares and the rights issue. It is in appreciation of SIA and what it means to Singaporeans. It is NOT a financial decision.

    1. Hello Cheng KK!

      Thanks for sharing! In my response to MC just above, I said that I agree with him/her that we cannot always measure everything in dollars and cents, and that we have to be clear about our objectives with every decision we make with our money – whether it’s for an investment return, or for other reasons. You seem very clear about your objective when it comes to buying SIA’s shares, and that’s great!

      Cheers,
      Ser Jing

      1. Hi Cheng KK,

        Thanks for your comment. I agree with both you and Ser Jing. There are many different reasons for investors to invest in companies- financial rewards just being one possible reason.
        SIA is a company that is dear to many of us, Singaporeans and I am happy that there are so many people who want to support it through this trying time.

        1. Your analysis is not only spot on but brutally honest. Something lacking in coverage by local brokerages/banks. Many potential investors in SIA may have been saved by your article.
          SIA’s glory days are over. Period.
          It boils down to leadership which should have been renewed years ago. Yet CEO Goh has continued to receive million-dollar paychecks for his abysmal performance.
          Goh has destroyed billions in shareholder value since he became CEO.
          No one had expected NOL to be delisted after 48 years. And we should not be surprised to see SIA go under, maybe privatised by Temasek or merged with other airlines.

          1. Thanks, Phillip for your kind words and for your sharing.

            It is possible that Temasek may eventually take SIA private. The underwriting of the rights issue and the MCBs will likely see Temasek’s stake in SIA rise substantially as some shareholders may not subscribe fully to both of them. This could be Temasek’s first step to eventually privatising the company.

  7. Excellent analysis and insights! Like what Phillip Ang said, something lacking in coverage by local brokerages/banks. Thank you for sharing.

    1. Thanks for your kind words, ET!

      I try to give an honest and objective opinion of what I see. The beauty of being an independent blogger.

  8. Great selfless opinions
    Everybody is entitled to
    Whatever it is guys, do ur sums and live with no regrets
    Stay safe and stay on man…

  9. Well, if you based on your analysis on NAV post rights, EPS post rights…you are spot on…can’t really fault you on that. But at current PB of 0.55, it’s really attractive even if you factor in the absolutely worst case scenario this year. At this moment, the market assumes $6B will be wiped off SIA’s accounting books this year. $6B of losses factored in!

    SIA brand equity is something that we have not really appreciated. I also believe that this crisis will weed off the weaker airlines because financing for them will be extremely tough. The middle class particularly in Asia will continue to grow. The pie will be bigger with fewer players and less price competition. Make no mistake, this is a too big to fail company and it’s for long investors who can stomach the turbulence. I’m quietly confidently that in 5 years to come, the SIA faithful will be duly rewarded.

    1. Thanks for sharing, Alfred.

      Yes, think you are right that there could be less competition in the future if some of the smaller airlines exit the scene completely. That said, the aviation industry is traditionally a tough environment to do business and margins might still be quite thin. CAPEX requirements are also still going to be quite onerous so that could continue to impact free cash flow. I guess only time will tell.

      I also think the current price-to-book ratio (PB) is not useful as the book value per share is going to decrease dramatically after the rights issue. So we have no choice but to factor in the dilution to get a better picture of how the shares should be valued.

  10. there is no need for explanation, SIA is broke and need money. Temasek is forcing all to pay up. Those who dont want to pour good money after bad will lose, Those who pour good money after bad will lose also.
    Saving SIA is about spending money …loads of money that are paying bills, borrowing and expenses past due not making money.

    1. Thanks for sharing, Mike.

      Yes, SIA is desperately in need of cash so the rights issue is a necessary evil to save the company. But there is some good news that the government will be subsidising up to 75% of Singaporean employee expenses for the aviation industry over the next nine months. This could at least save SIA some expenses.

  11. Lovely schoolboy analysis. Why schoolboy? How can you evaluate a stock if you don’t understand what the competitors are equally going through? Cathay, Dubai and qantas are the boys to watch here. Only qantas has a sustainable model because of its ceo. Few and far between

  12. Jeremy / Ser Jing,

    Thanks for sharing, a fair opinion on SIA.

    Stock market needs all kind of investor, speculator, long-term value investor, sentimental, etc … very subjective, no right or wrong.

    In my personal opinion, air traffic demand will bounce after convid-19, but airline stocks may take a few years to revert back to profitable position owing to fierce competition among airline companies.

    Incidentally, Warren Buffett sold some of his holding on US airline stocks recently without providing any reason.

    1. Hello YP! Thanks for reading our blog, and for your kind words!

      I also think that air travel will return. The key is for the companies within the air travel industry to survive – and for their shareholders, hope that the companies will survive without diluting them massively.

      Cheers,
      Ser Jing

  13. Keep up the good work, Jeremy. It is right to support our national carrier if management did a great job. If we continue to support an abysmal management team then I think we are sending the wrong message.

    The couple of billion of dollars are peanuts which someone can easily foot. No matter how much money one pumps into a failing company, it will fail finally. Injection of money should come with injection of new management.

    1. Thanks, cs Lim!

      Yes, let’s hope that the management team makes good decisions going forward.

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