Can $SIA(C6L) Fly Again?

This article is written by @fayewang from InvestingNote.

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:

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:

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.

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’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

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

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

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.

Check 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

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9 likes
8 comments
MasterLeong888

very good read, thanks

Delinz

Oh I mean this article stated that SIA owned 56% of Tigerair?

TheSignalBlog

Reply to @Delinz : Thank you for pointing this out. We realized there was a typo error. Tiger is wholly owned by SIA. We have already edited it in the article.

Delinz

Sorry, but SIA has privatized Tigerair?

JSKM

Very detailed post! Keep it up

rubberducky

stocks aside. the quality of SIA stewardess, ahem, falling in recent years also lah. correlation ?


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The 6 Stocks Which Grew More Than 5% In Price In A Month

With the trade talk between China and US being resumed after the G20, both Singapore and HK markets rallied big time. It's time to spot some potential stocks!

Let's look at 3 Hong Kong stocks that have caught the public's eye:

According to Reuters, on 27th June Shares in Hong Kong rose on Thursday, extending the previous day's cautious gains, as investors' hopes of a trade truce between the United States and China rose ahead of a highly anticipated meeting between the countries' leaders. At the close of trade, the Hang Seng index was up 399.44 points or 1.42% at 28,621.42, adding to the previous day's 0.1% gain.

The top gainer on the Hang Seng was Sunny Optical (2382 HK)-mainland China’s largest manufacturer of smartphone camera modules and lenses which gained 4.03%. Sunny Optical is also up by at least 20% within a month. If you have a 5x leverage, it would be more than 100% gain!

Besides Sunny Optical Technology Group Co Ltd, AAC Technologies (2018 HK)-acoustic components supplier to Apple Inc also rose 7.1 per cent to HK$47.50 as reported by South China Morning Post. It has also risen more than 10% within a month. If you have a 5x leverage, it amounts to more than 50% gain!

The third HK stock would be Sands China (1928 HK) – subsidiary of Las Vegas Sands Corp, currently operates The Venetian Macao, Sands Macao, The Plaza Macao, Sands Cotai Central and The Parisian Macao. Macau’s casino operators have pledged billions of dollars to develop non-gaming attractions in a bid to secure new licenses, but analysts predict only the more efficient like Sands China and Galaxy will be able to curb losses and emerge winners. Analysts are also bullish on Macau’s long-term fundamentals given it is China’s only legal casino hub, its greater connectivity to the mainland and massive growing middle class as reported by Reuters. Sands China rose more than 10% within a month. If you have a 5x leverage, it would give you more than 50% gain!

Now back to the local stocks, we have three blue-chip Singapore names which the market has been longing for: SGX, City Development, Singapore Airlines.

From FY2014 to FY2018, Singapore Exchange’s earnings climbed 13.4% from S$320 million to S$363 million, an increase of around 3.36% per annum. The growth is supported by its revenue rising from S$686 million to S$845 million during the same time frame. As of the end of June 2018, Singapore Exchange’s balance sheet carried S$831.6 million in cash with zero debt. It had an ROE of 34%, which is considerably high. Singapore Exchange’s current share price is at S$7.94, translating to a price-to-earnings (PE) ratio of 23.47 and a dividend yield of 4.72%. It rose more than 5% within a month and if you have a 5x leverage, that would be 33% gain!

In the earlier part of June, The Business Times named CITY Developments Limited (CDL) as one of the hot stocks to look out for. CDL gained more than 5 per cent in the early session on its renewed offer for all remaining shares in London-listed subsidiary Millennium & Copthorne hotels (M&C). Traders told The Business Times that CDL's share price may have also been given a lift due to growing optimism that the US Federal Reserve is looking at the possibility of rate cuts. It rose more than 15% within a month and if you have 5x leverage, it would be close to 75% gain!

Lastly we have Singapore Airlines(SIA) which rose more than 5% within a month. If you have a 5x leverage, the gain would be more than 25%!

How can you leverage up 5x without using margin or CFDs?

Simply by using a derivative called Daily Leverage Certificates (DLC). It is a derivative issued by Societe Generale, and listed on the Singapore Exchange (SGX). Learn more here: https://dlc.socgen.com/en/product/search

Here's the new batch of DLCs just released on 3rd July 2019:
$SUNNY OPTICAL(2382.HK) , $AAC TECH(2018.HK) , $SANDS CHINA LTD(1928.HK) , $SIA(C6L.SI) , $CityDev(C09.SI) , $SGX(S68.SI) .

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Getting started on picking and analysing stocks: Part 2

This is written by @fayewang, stock market analyst at investingnote.

How to analyse a stock: Step by step guide on how to do fundamental analysis

I would like to share my method of analysis in this part. I believe that there are different investment strategies, and my method of analysis in this article is just one of all the possible approaches. My method of analysis puts more focus on the operating performance because I believe that the stock price in the long-term will depend on whether a company has a sustainable business, and I would also like to emphasise the phrase ‘long-term’ here because I am a fundamental investor and I think my method will be more applicable for medium/long term investment.

1. Start with the financial statements
Financial statements are crucial because they show the performance summary of companies. Normally, they are audited and released on an annual basis. From, financial statements, investors can get the detailed explanations of a firm’s operating performance, financial positions, strategies and prospects. They are valuable and useful because all the numbers reflect a firm’s operation and management directly. Furthermore, such information is un-paralled because it comes direct from the companies themselves. In order to conduct analysis in an efficient way, I will break them into several parts, and filter the data according to my analysis criteria.

a) Income Statement
Also known as ‘consolidated profit and loss account’, income statements provide analysts and investors with a straightforward gauge for performance. This statement can answer three questions that investors care about the most: 1) how much revenue did the firm generate 2) how much expenditures did the firm spend and 3) how much profit can the firm distribute.

As there are varieties of ratios or indicators you can choose to estimate the firm’s performance, I will introduce the indicators that I usually use in my analysis.

Revenue and revenue growth
As revenue gives a first impression of a company, it gives investors a rough idea how it is doing. Before checking other numbers like expenditure, revenue provides information about how much money a company can generate from its business. If you observe a firm with declining revenue, that may mean that the firm is facing problem with running its business or is experiencing unfavourable economic situations.

Another important thing to note is the growth rate of revenue. It indicates a company’s potential for further expansion, and it is also a good indicator that can show the developing stage of a firm in a business cycle. To be more specific, a company with revenue growth rate higher than 10% can be viewed as a growing company at the expanding stage, while those with ranges between 5%-10% can be seen as enjoying reasonable steady growth and might also be experiencing the peak of their business. For companies with revenue growth lower than 5%, it can indicate that it is already a mature company and may be falling into the recessionary stage. Particularly, negative revenue growth may indicate serious problems of a business or even the start of an economic recession if many firms witness decline at the same time.

Net profit and profit margin
Net profit is the number after subtracting all the expenses from revenue, and thus reflects the cost management and efficiency of a company’s operation. As it also shows the result after the deduction of taxation and interests, it can be considered as the net value that a firm has created from its business. In some cases, a company’s net profit can be low even when the amount of revenue is high, which shows the inefficiency of cost management.

Profit margin represents how much of sales actually paid off and is earned by the company. It is suitable for comparison amongst a company’s peers because it can eliminate the size and scale differences between companies. Looking at the absolute amount of net profit only is not sufficient in analysis, it would be more relevant to compare it with industry peers. For example, the net profit of Singapore airline in FY2015 is $406.7 million, while Cathay Pacific held $6 million net profit in 2015. Based on the absolute amount, Cathay Pacific definitely has a smaller scale and lower profit. However, in the financial year of 2015, Cathay Pacific observed higher profit margin of 5.9% as compared to 2.6% of SIA group, which means Cathay Pacific has a higher rate of converting sales to company earnings.

Some firms also put basic and diluted earning per share in their income statement, and these ratios will be discussed in the “stock information” section later on. As investors, we also have to bear in mind that time matters here, hence the comparison on a year-on-year (yoy) basis or on a quarter-to-quarter (qoq) basis can give you different analysis results.

b) Balance Sheet
The balance sheet shows you how well the firm utilizes its assets and how much liabilities does the firm owe to its debtholders. Therefore, the whole sheet can show the firm’s overall financial position. There are three parts in the balance sheet: Assets, Liabilities and Shareholder’s Equity. The basic formula is known as Assets = Liabilities + Equity. The underlying principle is simple: all the funds that company can use for acquiring assets is either raised from borrowings or from issuance of equity.

Namely, there are 2 key principles for analysing a balance sheet:

i) Check specific items based on the nature of the company’s business



(Source: Shareinvestor financials)
The first picture is the balance sheet components of Sheng Siong,
The second picture is the balance sheet components of M1.

The items stressed in the balance sheet can be different according to the types of firms. Using supermarket retailer like Sheng Siong as an example, a majority of their non-current assets will be property, plant and equipment (PP&Es) such as retail outlets, while their current assets will include inventories, trade & other receivables, and cash & cash equivalents. Sheng Siong does not have much intangible assets and non-current liabilities because they sell physical commodities and are focused on high liquidity. Hence, if there is a higher amount of inventories and lower amount of cash and receivables at the same time, it implies that they might have problems with selling their goods. However, things are different with companies in different industries. Take M1, the telecommunication service provider for example. M1 holds a larger amount of non-current assets (which is their fixed assets and licences) than their current assets. Compared to Sheng Siong, M1 also owns a greater proportion of non-current liabilities in their balance sheet because they may have signed long-term contracts.

ii) Investigate items with extraordinary numbers
Analysts should pay attention to “extraordinary numbers” such as too much debt, or some unusual change in numbers. For example, a sharp increase/decrease of receivables from previous financial year. Debt can be a great source of capital and can benefit companies by creating a certain tax shield. However, they can also bring stakeholders headaches when the company bears the burden of heavy debt. For example, Ezra has seen their net debt-to-equity ratios over 100% before they went bankrupt. This example illustrates that several ratios can be used to test the solvency and liquidity of a company, such as debt-to-equity ratio and interest-Coverage Ratios, you can check more at http://quickbooks.intuit.com/r/financial-m...

c) Cash Flow Statement
Cash flow statements show the details of a firm’s cash inflows and outflows. In simpler terms, shows exactly how a firm earns and spends every dollar in their operation. For cash flow analysis, I will usually focus on 2 items specifically: 1) net cash generated from operating activities and 2) free cash flow.

Net cash generated from operating activities directly show you whether a firm earns more from selling goods or providing services than their purchasing expenditure. This indicator is similar to net profit, but focuses on the flow of cash in their main business activity. Free cash flow (FCF) here refers to the ‘cash and cash equivalents at end of the financial year ’ in the cash flow statement, and represents the amount of cash a firm can spend freely on certain purpose. However, free cash flow can also be tricky because the number is cumulative based on the amount at the beginning of the financial year. Hence, when a firm has a higher free cash flow at the end of financial year, it might not mean that it actually generated a higher net cash as compared to the previous year.

Normally, the higher the number, the better the performance. From my perspective, as long as the firm is able to generate stable and positive net cash, it is a good sign. If there is huge change in the FCF, the reason should be shown in the notes section of the report.

d) Earnings Manipulation

Although there is a possibility for firms to manipulate their financial statements (as seen in the cases of multiple accounting scandals and frauds), all the accounting standards and audit firms are designed to prevent earnings manipulation (also called as ‘earnings management’). Besides, the technique of ‘cook the book’ is already familiar with analysts, and thus can be easily be identified by them.

Here are some common ways of earning manipulation: http://www.investopedia.com/articles/analy...

2. Stay updated with related news


Financial statements are an internal source of information, but news about a firm is information source reported externally. As companies only releases results once in a while, news is an important source to keep shareholders updated. For Singapore market, following links should be helpful to get timely news:
http://www.theedgemarkets.com.sg/
http://www.straitstimes.com/business/compa...
http://www.businesstimes.com.sg/
https://www.fool.sg/

As the market responds to news quickly, thus it is important to be updated. News might not be information for thorough analysis, but it will give readers clues about a company’s management. Readers can then discern whether it is a bad or good news and then act accordingly. Some news that have significant influence to a stock’s price include : 1) IPO and delisting 2) Mergers and acquisitions 3) government policy change 4) Financial result release 5) Business expansion or close.

3. Peer Companies Comparison
Investors should know by now that any comparison is meaningful only when there is an appropriate benchmark. For example, a revenue of $15,228.5 million may mean a lot, but a 5% increase from $14467.075 million in the previous year could be mean a little. The point is, solely observing a company’s data is not so conclusive as comparing it with its peers in the same industry. For example, looking at the performance of M1 in the recent 5 years, it will show the group having a slight decline in revenue and profit, but still holding a stable balance sheet and an improved cash position. It might not seem that the company is facing serious performance issues. However, when peer comparison is done, it will show that M1 is the weakest company in the telco industry compared to its peers like Singtel and Starhub.

For peer comparison, I will focus on certain criteria: the profit margin from the income statement, payout ratio and dividend per share from the key stock information, and the free cash flow from cash flow statement. I would usually skip indicators of balance sheet because different firm have various focus on items based on their business nature. The industry’s average are also important, as it provides a benchmark for the firms within a particular industry. For example, it is better to compare the P/E ratio with peer companies and also with the industry’s average, in order to better understand a firm’s position in one industry.

4. Key Stock Information
As mentioned before, I will not focus too much on the price of a stock but here are the key ratios that are valuable to show the stock price performance.
a) Earnings per share. For EPS, the higher the better. In the long-term, avoid stocks with negative earnings per share.
b) P/E ratio and Price per share/ EPS. Usually, the lower the better. A lower P/E ratio indicates that the stock is undervalued. However, P/E ratios provide different indications for different stocks. For growth stocks, a higher P/E ratio might be more anticipated.
c) Payout ratio. Firms with higher payout ratio is more willing to distribute their earnings to shareholders, but payout ratio over 100% is not always good as they are paying more than they can afford.
d) Net asset value (NAV). NAV indicates the debt-free assets companies have, that can be used for their business activities. The higher the better.

Personally, I suggest investors to choose stocks which meet the following conditions: 1) a positive EPS 2) a payout ratio more than 70% 3) a P/E ratio lower than industrial and peer number (normally lower than 15 is preferable) 4) a firm with an ROE over 15%.

Key takeaways
In conclusion, this article explains my method of fundamental stock analysis. In the previous part 1, I explained the importance of time horizon and how to choose different types of stock and build portfolio based on time horizon. In this part 2, as a fundamental investor, I focus on long-term (about or over 1 year) investment and the analysis is based on financial reports. The aim is to check a firm’s performance in recent years, and to see if it has the potential to maintain growth in the future. Thereafter, using several indicators to determine whether the stock is undervalued or overvalued. Making comparisons with peer companies will reveal its position and competition within the industry. Lastly, getting updates on a stock from related news also provide more information about the overall management and performance.

Examples of Analysis
Some examples here can demonstrate how I actually apply my analysing method.
“Can $SIA(C6L) Fly Again?”, check the article at: https://www.investingnote.com/posts/54429
$M1(B2F), is it the One? ”, check the article at: https://www.investingnote.com/posts/53014
“Can $ComfortDelGro(C52) regain its customers of taxi service?”, check the article at: https://www.investingnote.com/posts/48646

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