SIA Stock Price Soared 14% After Possible Vaccine News: Is Airline Stock A Buy?, Money News

Singapore’s stock market rose to levels not seen since early June this year as investors applauded the news of a possible vaccine to defeat the coronavirus pandemic.

On November 10, Singapore’s benchmark stock market index, the Straits Times Index (STI) rose 3.7 percent, or 95.6 points, to 2,705.

The biggest STI winner that day was Singapore’s flag carrier Singapore Airlines (or SIA for short), which rose 14 percent to $ 3.91.

It would have been a respite for investors, as the airline has been more than hit by the Covid-19 pandemic.

I hope that Pfizer and BioNTech’s promising Covid-19 vaccine, which is touted over 90% effective, will put an end to the virus that has made 2020 a year to forget.

But even if the vaccine, or other vaccines, are safe for mass use, does it make Singapore Airlines an automatic purchase?

Or are there better opportunities in which we can invest our money?

Let’s find out.

TL; DR: Is it worth buying Singapore Airlines (SIA) stock?

We will explore the value of the company’s investment understanding the following:

• SIA is operating in a price sensitive industry, and that does not bode well for the long term as an investor.
• The cash is intended to keep SIA’s fleet young, and that means the money cannot be used to grow your business or pay increasing dividends.
• SIA’s balance sheet has been strengthened by recent rights issues, but the question remains how long it can last.
• In my opinion, there are better places to invest our money in the long term.

Capacity cuts slowly ease

In early March this year, Singapore Airlines announced that it “will cut 96% of the capacity that was originally scheduled for the end of April”, calling the current situation the “greatest challenge” it “has faced in its existence. ”.

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However, things are looking a bit better now.

Last month, SIA said it will continue to increase flights gradually, reaching about 15 percent of its usual passenger capacity by the end of this year.

Also, news has just come in that the Singapore-Hong Kong air travel bubble will start on November 22 with one flight per day to each city, gradually increasing to two flights per day starting on December 7. SIA will be Singapore’s airline of choice.

If the vaccine proves truly effective, people could travel the world freely once again and SIA’s business would eventually recover.

But whether airlines can continue to do well in the long run is another question, as the long-term economics of airline stocks don’t look very good.

Cheap is good for consumers

The airline industry is known for being competitive. Unlike luxury items, there is very little brand loyalty when it comes to flying on a particular airline.

I, for my part, opt for the low-cost option if my trip is only within Asia, which is mainly the case. There are many options to choose from: Scoot, Jetstar, AirAsia, etc.

Today, with the advent of price comparison sites like Skyscanner, I can make my life easier by selecting the lowest price to fly from one place to another.

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(Yes, I don’t mind the inconvenience of having nothing to snack on for a few hours.)

As an investor, I reject buying from companies that accept prices.

Price takers tend to have low net profit margins, as they cannot impose a high price for their products. I prefer to invest in companies with net profit margins of more than 20 percent (or the price makers).

In the case of SIA, its net profit margin is clearly low. For the fiscal year ended March 31, 2019 (FY2018 / 19), it posted revenue of $ 16.3 billion, while its net profit was $ 682.7 million.

(I’m not using the 2019/20 fiscal year results as SIA posted a net loss due to the pandemic.)

By dividing the net profit by the revenue, we get a net profit margin of just 4 percent, which is not going to fly for me..

Keep me young

In addition to its low profit margin, SIA has to regularly spend cash to maintain its young fleet of aircraft, as it is committed to operating a modern fleet.

As of March 31, 2020, the combined average age of the SIA group’s fleet was five years and 11 months.

What this means is that almost every six years, the free cash flow that can be returned to shareholders as dividends or used to reinvest in your business for growth has to be used to buy new planes.

The capital outlay is huge too; planes are not cheap, you know?

For fiscal 2019/20, about 97 percent of SIA’s capex of about $ 5.1 billion went to aircraft, spare parts, and replacement engines.

Let’s look at the following table to understand SIA’s free cash flow situation for the last six years:

Overall, we can see that your free cash flow has become increasingly negative from FY2014 / 15 to FY2019 / 20, with only one slightly positive year.

Investors should remember that companies reinvest in free cash flow to grow their business, buy back their shares, pay dividends, or reduce debt.

Strengthened balance sheet, but for how long?

Add the lack of free cash flow to the fact that SIA has more debt than cash on its balance sheet., business prospects are not very good. I prefer companies to have more cash than debt, as they are more likely to withstand tough economic conditions.

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As of March 31, 2019, SIA’s balance sheet had $ 2.9 billion in cash but $ 6.7 billion in total loans. The figures translate to a net debt position of $ 3.8 billion, almost six times the fiscal year 2018/19 net profit of $ 682.7 million.

But earlier this year, SIA strengthened its balance sheet by raising funds through shareholders to the tune of $ 8.8 billion.

It also raised additional money of about $ 2.5 million through secured aircraft financing, lines of credit, and short-term unsecured loans.

With that, as of the last quarter ending September 30, 2020, the airline’s total loans were $ 9.5 billion and its cash balance was greater than $ 7.1 billion.

To save cash, the airline’s dividends were also reduced, from 30 Singapore cents in fiscal 2018/19 to just 8 cents in fiscal 2019/20.

During the first half of fiscal 2020/21, SIA did not declare dividends (a year ago, it declared 8 cents in dividends).

Although SIA’s balance sheet is a bit stronger now than before, the fact is that it is operating in a price sensitive industry without much pricing power.

And could it be a matter of time before SIA faces the same old problem of having a weakened balance sheet? Only time will tell …

SIA is not a purchase for me

With all due respect, Singapore Airlines has been doing a fabulous job as a national carrier amid the pandemic. It has been instrumental in having Singaporeans evacuated back home when countries closed their borders.

I know for sure, as one of my loved ones was trapped in India and our government and SIA worked closely with our foreign counterparts to get it back, along with 600 other people.

But as an investment, I have my reservations.

Famed investor Warren Buffett once said that he judges companies by their ability to raise prices. (emphasis mine):

“The most important decision when evaluating a company is pricing power. If you have the power to raise prices without losing business to a competitor, you have a very good deal. And if you have to have a prayer session before you raise the price by 10 percent, then you have a terrible business. ”

SIA operates in an industry that is very sensitive to price increases and that is not a good long-term investment. Therefore, there are better opportunities in which to invest.

This article was first published on Seedly. All content is displayed for general information purposes only and does not constitute professional financial advice.