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Can $SIA(C6L) Fly Again?

By @fayewang from InvestingNote

Can $SIA(C6L) Fly Again?

Company Background:

Singapore Airlines Limited is engaged in passenger and cargo air transportation, engineering services, training of pilots, air charters and tour wholesaling and related activities. The Company has four segments that contribute to its operating revenue:

  1. Airline operations
  2. Engineering services
  3. Cargo operations
  4. Others

The SIA Group has more than 20 subsidiaries with all the experts, which include(but not limited to):

  1. SilkAir (a wholly owned subsidiary)
  2. Scoot (a wholly owned subsidiary)
  3. TigerAir (a wholly owned subsidiary)
  4. Singapore Airlines Cargo

SIA’s business model:

SIA’s business model

Source: SIA FY2016 report

One strength of SIA group is their well diversified and targeted business. After the group took 56% ownership stake of Tiger Airways and become its parent company in October 2014, SIA accomplished their strategic portfolio. Subsidiaries include Silkair, Scoot air and Tigerair, all contribute to the revenue of SIA group. The well structured business model also plays an important role in passengers yield battle amid SIA group and their competitors.

Recent Events & News:

Singapore Airlines, financial result 2015/2016, find the full report at: https://www.singaporeair.com/saar5/pdf/Inv...

March 20, ‘SIA Cargo may make provision in current financial year due to fine’, refer to the news at: http://www.businesstimes.com.sg/companies-...

March 17, ‘SIA, 10 other airlines hit with S$1.2 billion fine by EU regulators for taking part in cargo cartel’, see the content at: http://www.straitstimes.com/world/europe/s...

March 15, ‘SIA's load factor up 3.2 percentage points in February’, check the detail of performance at: http://www.businesstimes.com.sg/companies-...

Performance Summary:

SIA group, the flag carrier based in Singapore, maintain their steady operating performance since 2012. In 2016, their net profit doubled, which is not really a result of better operation, but mainly because of decreasing fuel price and less loss in the activities from hedging on fuel. SIA preserves a stable balance sheet. The group gained high dividend on long-term investment, thus spent additional money in investing, plus less proceeds from different disposals and share insurance, SIA held lower amount of free cash in 2016. When compared to competitors, SIA keep the most stable performance. Under the circumstance that Cathay Pacific met loss this year, SIA managed to beat Cathay by profit margin, but threat from budget airline companies are still serious.

Financial Highlights:

1. Operating performance:

SIA Revenue

SIA Profit

a) FY2016 performance:

Compared to the performance in 2015, SIA observed 2.1% drop in their revenue in 2016. Revenue was decreased in all four business segments. For flight carrier like SIA, the fuel cost will occupied large portion of the total operating expenditure. Thus, the $1052.7 reduction of fuel cost in 2016 was the main reason of 4% expenditure decline in the income statement.

News about the effect of lower fuel price on SIA’s net profit in the financial year of 2016: ‘SIA profits soar on lower fuel prices, one-off gains’, refer to the news at http://www.straitstimes.com/business/sia-p...

Meanwhile, profit of SIA doubled with the quantity of $851.8m in 2016, compared to the number of $406.7m in the last year. SIA has achieved outstanding result in profit in 2016. To find out the reason behind the sharp rise, formula of net profit is provided here:

Net profit = Operating profit + Other Profit – Other Expenditures

Thus, in the case of SIA, the growth of profit was a consolidate contribution from:

  1. Lower fuel expenditures due to oil price decline
  2. Higher operating profit of $604m, which arose from less ”Fuel hedging loss recognised in ‘Fuel costs’”
  3. Higher other profit such as Dividends from long-term investments
  4. Lower other expenditures such as Impairment of aircraft

However, it turned out that the significant progress in net profit is not really a result of improved operation.

b) FY2017 performance:

SIA’s load factor up 1 percentage point in January, and gained a further 3.2 percentage points increase in February. Improvement has been seen in East Asia, Americas, Europe, West Asia and Africa, except 3.3 percentage points down in South West Pacific. (Data resource: see attached files/ Jan Market Outlook/ Feb Market Outlook)

2. Financial & Cash flow position:

Overall, SIA had a health and stable financial position. For the group’s cash position, SIA generated greater net cash from the operating activities, with 45.4% increase of $938.3m, which was mainly contributed by increasing sales in advance of carriage and refund of fines.

SIA Cash Position

From the chart, the trend is quite obvious that SIA earned more cash from operating activities, but the amount of free cash flow decreased and the group even observed the lowest number in recent five years. The reason is that SIA invested more on purchase of property, plant and equipment and acquisition of non-controlling interests without a change in control, thus leads to greater capital expenditure. At the same time, the group received less proceeds from different disposals and share insurance. In a word, with a stable balance sheet, SIA adopted strategy of heavier investment, the group held less amount of free cash, in other world, face a less favourable cash position in the financial year of 2016.

3. Stock information:

Current earnings per share (EPS) of SIA’s stock is 0.68, with a P/E ratio of 14.761, and the P/E ration of airline industry is 14.732. The P/B ratio is 0.85. During the recent five years, SIA had the lowest payout ratio in 2016, but both the group’s dividend and earning per share reached the highest level, which also reflect the superior profit achievement of Singapore airline in that year.

SIA Stock Information

SIA’s stock is also trading near its 52-week low, see details at this post: https://www.investingnote.com/posts/53616

4. Peer comparison:

SIA’s business was threaten by the competitors from two aspects: 1) Threat from aviations especially from those based in middle east such as Emirates airline, Etihad airways and Qatar airways 2) Pressures from budget airlines in Asia market such as Airasia, Indigo and Jetstar Asia

However, the “Big Three” from middle east market include Emirates airline, Etihad airways and Qatar airways, are all private companies that do not have shares outstanding. We selected Cathay Pacific — a flag carrier in Hong Kong, and Airasia — a Malaysian low-cost airline, as the peer companies of SIA group. Comparison of their profitability, management and stock price will be presented in the following parts.

a) Profit Margin

SIA Profit Margin

The chart shows that Airasia has a quite volatile profit margin in the recent 5 years, yet they managed to achieve an impressive profit margin of 29.4% in 2016. Comparatively, SIA airline and Cathay Pacific have stable operating performance, but Cathay pacific just suffered from their first loss in the recent 8 years. SIA outperform Cathay Pacific with improved profitability in the financial year of 2016, whereas still under the competitive pressure from Airasia.

b) Cash Position

Free Cash Flow

Obviously, among the three companies, Cathay Pacific always hold the highest amount of free cash in their balance. SIA group obsesses lower cash amount than that of the last year, the overall number is constant in recent years. Similarly, Airasia has a stable cash holding. In a word, SIA always maintain higher level of free cash than Airasia, but in a disadvantageous position when compared to Cathay Pacific.

c) Price to Earning ratio

P/E Ratio

When determine the stock price, we choose the indicator of P/E ratio to check those stocks are overvalued or undervalued at what degree. From the chart, stock of Airasia is severely overvalued in 2014 due to their extreme low profit in that year. SIA has the most stable P/E ratio trend in recent five years, but in the financial year of 2016, SIA has the highest number among that of three companies. Take the airline industrial P/E ratio (14.732) as a benchmark, SIA is slightly overvalued with a ratio of 14.761, Cathay Pacific and Airasia are undervalued when compared to both industrial level and ratio of SIA, with number of 7.19 and 4.74 respectively.

SIA’s policy crisis:

Serious flaw appears in SIA’s employee medical leave system SIA’s strict medical leave policy became controversial after death of a stewardess in San Francisco, who was found ill before the accident. According to some employees, diseases like flu, stomachache or fever are considered as a casual medical certificate. If employee take medical leave with casual MC, it may has negative impact to their rate of promotion or contract renew, thus, many people choose go to work with a sick body.

What might be the consequences of the policy crisis?

Two possible consequences may arise from the scandal if SIA group cannot adopt new measures to fix the problem properly:

1) Deteriorated incentives and service standards

In the long run, employees of SIA group may lose their incentives to work since under the current medical leave system, they are ‘forced to work’ when they feel sick in some degree. Also, flight attendants with illness have higher chance to provide less satisfactory services, and what makes things worse is that passengers might be infected. Once these things happened, SIA group can lose their customers easily under the fierce competition of aviations for higher passenger load.

2) Public effect and brand damage

As the flag carrier of Singapore, SIA is supposed to value their brand image. News about the death of stewardess of SIA already brought SIA some negative impact, for instance, the stock price drop 2.5% within after the news came out on 4 February. It is better for the group to reconsider their policy for the sake of long-term prospects.

Here’s some related news to know more details:

4 feb, ‘SIA refutes netizen's claims over MC rules’, refer to the news here: http://www.tnp.sg/news/singapore/sia-refut...

4 feb, ‘READ: Former SIA flight attendant exposes the company’s “severely flawed” medical leave system’, refer to the news here: https://coconuts.co/singapore/news/read-fo...

See responds from SIA:

10 feb, ‘SIA reassures cabin crew on medical leave system’, http://www.straitstimes.com/singapore/sia-...

Key takeaways:

Singapore Airline got fine from European Commission (EC) for their participation in the cartel with 10 other airline companies, and announce there will be a $111.8m provision, which may leads to decreasing profit in the financial year of 2017. SIA’s performance in 2016 is less satisfying than previous year, with lower revenue and less favourable cash position. Net profit doubled but it is not derive from improved business income. SIA has a moderate operation when compared to competitors, and recruit passengers in home market is the first priority. In the near future, SIA can expand their in north and south America market, which has potential to explore but the group haven’t touched yet. Based on the performance in the recent five years, the company’s operation is quite stable and the stock is less volatile than its competitors, hence stock SIA can be considered as a defensive stock.

Community Estimations Here:

@wklalala: https://www.investingnote.com/posts/53058

@alansmith: https://www.investingnote.com/posts/47848

@Dividend_Warrior: http://www.shareinvestor.com/fundamental/f...

@joehigashilee: https://www.investingnote.com/posts/42973

 
Ernest Lim
Investing Note

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