A Request From Reader - Singapore Airlines Ltd (SIA)

A reader recently asked about my comments about "Singapore Airlines Ltd" (SIA) and whether it is worth to collect at $10.60? (As of today, it is $10.65.)

So here are my comments: 

1. Business dependent on tourism and economy - Recently my boss went overseas for work and took SIA. She commented she was very worried about the economy, because when she took the business class and there was almost no-one. Do note that this was a Friday night, which usually will mean the business class will be packed. To her this is the barometer of our economy - Less people taking business class meant that the economy will be getting worse. In this context, you can also use this as an estimate of the future of SIA business.

2. Fixed assets which are mostly planes - Although planes are fixed asset with a resale value, but the actual number of buyers are limited and thus, planes are not easy to sell off. In this situation, this meant that if SIA intend to sell any of their planes to get some extra cash (maybe to pay dividend), it will have a hard time.

3. Heavy capital expenditure - A company with heavy capital expenditure will not have enough free cash flow to pay as dividend or expand business. SIA require to service its planes on a regular basis to ensure every flight is a safe one. Thus, SIA always has high capital expenditure yearly.

Net Cash Provided by Operating Activities

Capital Expenditure

After deducting the Capital Expenditure from the Net Cash Provided by Operating Activities, Free Cash Flow for FY'14 is NEGATIVE $533 Million, while FY'15 is only a small $96.5 Million.

4. Dividend Yield - Due to the lack of Free Cash Flow, I believe this has adversely affected the dividend yield. As per Dividend Seeker website, the dividend yield of SIA has been ranging between 1.5% to 3%. With the same amount of Cash, you can buy OCBC shares and get better yield out of the investment.

SIA Dividend Yield

OCBC Dividend Yield

5. SIA Engineering Ltd - This listed co. is 77.87% owned by SIA. However, do note that SIA passes SIA Engineering Ltd to service their planes and then SIA owed SIA Engineering. Then SIA Engineering announced dividend to pass to SIA and then...etc..etc... I believe there are too many related transaction between this 2 companies and how much of the earnings by SIA Engineering Ltd is consolidated in SIA financials. So how much are actual earnings? We will never know.

6. Silkair, Tiger and Scoot - Following the recent acquisition and delisting of Tiger Airway, SIA will have 3 fully-owned subsidiaries (correct me if I am wrong...), which are competitors of each other. This increases expenses for SIA but will adversely affects its revenue as these subsidiaries will compete with one another over the same target customers.

In Short

As per my assessment above, I do not think SIA is a good buy currently. What you are paying in excess will be basically the "SIA" brand. Moving forward, its financials will definitely affected with lower revenue and higher expenses.

However, if the price moves further downtrend, maybe below 9 (below 2008/2009 lowest point), there could be a possibly to relook at this stock.

Current Price: 10.65 as of 4 Jun 2016

Please do your own due diligence before you invest in this stock.

Do note the author is not vested in this stock/company.

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