Singapore Airlines (SGX: C6L), SIA, is Singapore national airlines, icon of Singapore when flying proudly in the air for decades. Over the past few months of Coronavirus crisis, Singapore Airlines fall in share prices over 30%, aligned with the airlines industry as the business drops by about 90% due to international travel restrictions in many countries.
As a customer, many people enjoy the premium services given by SIA, including the high safety standard with newer aircraft than the peers. However, as an investor, SIA is not a giant stock worth investing (mentioned before in earlier post). The high standard services, skillful pilots and newer aircraft come with a price which affects the business.
Therefore, the on-going Coronavirus crisis may not be a short term crisis for SIA, even when Coronavirus may stop by this summer. In the mid term (within a year), airlines industry would recover gradually, those weaker in free cashflow (including SIA) would need extra funding. SIA has decided to issue rights and convertible bonds.
Luckily, both the rights and bonds issues are renounceable, meaning investors who have SIA, has the options to sell (or buy more) such rights, although the price may not be up to expected prices under current crisis for airlines industry including SIA.
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Let’s examine both options (sharing for educational purpose, please make your own investment decision):
1) Rights Issues
SIA just announced 3-for-2 rights issue, for every 2 shares owned, entitled to 3 rights to buy at $3/share. Comparing to last price of $6.50/share, the theoretical ex-rights price,
TERP = [($6.5 x 2) + ($3 x 3)] / 5 = $4.40/share
Rights issues usually is a pain for investor who looks for passive income (eg. collecting dividend), now may need to pay passive income in return. If an investor does not buy the extra shares of rights nor sell the rights, then the shares holding will be diluted, TERP price of $4.40 is just a reference, actual price after ex-rights could be lower when market sentiment is bearish.
Therefore, the decision for rights (whether renounceable or not) should be base on a new investing perspective. It is as if someone look at the current SIA stock, need to decide to buy at current SIA price at low optimism (regardless of rights issues). Is it a good investment?
“Crisis is Opportunity” (eg share price drops by over 30-50% to low optimism < 25%) only if it is a giant stock with strong business fundamental. Unfortunately, SIA is a blue chip stock (big reputable company with strong sponsor, Temasek which holds 55% SIA shares) but not a giant stock following Ein55 criteria. A giant stock is not defined by the size of company, rather it is by its internal strength. So, even a small cap stock could be a giant stock, many of these companies which are stronger than SIA, share prices even fall more than SIA over the past few months, therefore from investment perspective, SIA rights issues are not attractive.
“Crisis is Crisis” if the company has poor business fundamental. SIA is not a junk stock, it has reasonable business performance but over a long term period (10 years), all 3 key financial statements are not doing well:
1) Declining earning (intense price competition in industry with higher cost of extra services),
2) Declining free cashflow (negative due to high capex, eg, purchase of new aircraft),
3) Declining net asset value (NAV or equity) with higher debt / equity (therefore this time SIA prefers to borrow money from shareholders through rights and bonds issues with little cost).
The worst is SIA is a long term cyclic stock, average capital gains for long term investor over the past 10 years of holding is nearly 0% (eg. share price from $9/share in year 2009 to same $9/share in year 2019, before falling to $6+/share in the next 1 year). It means SIA is more suitable for short term / mid term trading within months or years, following the price trends.
So, taking up rights issues, even at low optimism price of SIA now, an investor has to take the risk of potential mid-term risk as airlines industry may take more than 6-12 months to recover, even Coronavirus may end in this summer. Buying shares with rights issues are more suitable if this is under short term with bullish stock market (if so, one may consider the stocks directly, not the rights).
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2) Bonds Issues
Besides short term “borrow” of money from shareholders through rights issues, SIA also borrow money in long term through Mandatory Convertible Bonds, MCB (amount could be converted to shares upon maturity). For every 1000 SIA shares, there is option to buy 2950 MCB at $1/unit with zero coupon (no interest paid).
Over the next 10 years, value of bonds would increase with average growth rate of 6% CAGR, $1000 MCB value would become $1806.11, if not redeem earlier (like a bond price with about 6% higher price yearly), will be converted back into shares at a fixed price of $4.84/share (near to TERP price).
This decision has to think from long term investing perspective. If SIA share could be more than $10/share after 10 years and bond not redeem earlier, then $4.84 equivalent of entry price is good. However, based on SIA past 10 years of price record (0% capital gains), for share price to be above $10/share after 10 years is even a question mark, although it is possible to be more than $5/share as this is a low optimism price, therefore less likely to make a loss, although may not be huge capital gains (depending which price cycle of SIA after exactly 10 years later, high, mid or low optimism).
Even for bond investor perspective (about 6% equivalent of coupon, assuming SIA redeem earlier, possible if share price may be low, SIA may not let long term supporter to make a loss as they help SIA during crisis), the deal is average as there are other short term corporate bonds (bond reasonable coupon and bond price discount) or dividend stocks which could easily pay 6-10% dividend yield while having 10 years to sell for extra capital gains.
The main strength of SIA is having a strong sponsor, Temasek. Even if minority shareholders don’t follow to buy rights or bonds issues, SIA can still “fly” with 55% funding from Temasek to help in low free cashflow (negative) now, not to mention extra funding from government to airlines industry to fight against Coronavirus crisis.
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In summary, rights and bonds issues of SIA is not attractive (but safe for long term investing as company unlikely to go bankrupt with strong sponsor). Since there are so many giant stocks with stronger fundamental and lower optimism (more discount in price below intrinsic values) in global stock market, an investor may not need to take up the offer, especially it is renounceable (can be traded, eg selling the rights to others but may not at a fair price).
We believe SIA will recover again soon, can fly again proudly in the sky, we will continue to be their faithful customers (passengers) but not a long term investor. Even one is interested in crisis investing on airlines stocks, therefore are other much stronger airlines giant stocks (please search past articles by Dr Tee if interested).
Although the analysis above for rights and bonds issues are for SIA, the same consideration could be applied for any stock with similar corporate actions. Check the stocks are for investing or trading, whether it is a giant stock, then align the decision making with own personality.
There are at least 26 Temasek / GLC stocks in Singapore including Singapore Airlines, controlling shareholder with 15% or more ownership directly or indirectly (investor needs to focus only on giant Temasek stocks):
Singtel (SGX: Z74), DBS Bank (SGX: D05), ST Engineering (SGX: S63), Singapore Airlines (SGX: C6L), SIA Engineering (SGX: S59), Singapore Exchange (SGX: S68), SATS (SGX: S58), Sembcorp Industries (SGX: U96), Sembcorp Marine (SGX: S51), Olam (SGX: O32), CapitaLand (SGX: C31), CapitaLand Mall Trust (SGX: C38U), CapitaLand Commercial Trust (SGX: C61U), Ascendas Reit (SGX: A17U), Ascott Hospitality Trust (SGX: HMN), Ascendas Hospitality Trust (SGX: Q1P), CapitaLand Retail China Trust (SGX: AU8U), Ascendas-iTrust (SGX: CY6U), Keppel Corp (SGX: BN4), Keppel Reit (SGX: K71U), Keppel DC Reit (SGX: AJBU), Keppel Infrastructure Trust (SGX: A7RU), Mapletree Logistics Trust (SGX: M44U), Mapletree Commercial Trust (SGX: N2IU), Mapletree Industrial Trust (SGX: ME8U), Mapletree NAC Trust (SGX: RW0U).
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