Following Temasek’s footsteps, Singapore Airlines (SIA) will issue a tranche of bonds yielding 3.03% targeted at retail investors. This is part of (my guess) the Government’s broader push for Singaporeans to invest in other instruments, other than property, something I’m very much supportive of.
With that said, I feel Singapore Airlines being the first corporate candidate to follow Temasek’s lead is, in my opinion, not an ideal one. Investors should tread lightly with this one. To illustrate my view, let’s take a deep dive into SIA’s financials and business.
Bond Issuance Details
Bond issue details and FAQ can be found here. Here’s a summary of the bond issuance details for easy reference:
| Bond Interest | 3.03% |
| Issue Date | 28 March 2019 |
| Maturity Date | 28 March 2024 |
| Interest Payments | Semi-annual |
| Application period | 9 am, 20 March 2019 to 12 pm, 26 March 2019 |
| Use of CPF / SRS Funds | Not applicable |
| Application Channels | Internet Banking / ATMs of DBS, OCBC and UOB |
Review of SIA’s ability to pay
What the Hyflux saga has reminded investors is that investing in fixed income is not just about the amount of interest you’re getting, it’s about the sustainability of the interest. There are broadly 2 elements to this – the strength of the company’s balance sheet and cashflows, and the company’s business outlook. Let’s start with the outlook.
Industry review and Business outlook (Personal Opinion)
To be honest with you, I absolutely HATE the airline industry as a business, especially the international flight segment. It is highly dependent on external factors in order to turn a profit, with limited things management can control over.
Revenues are highly dependent on air travel demand, which in turn is dependent on the world’s economy. The economy is highly cyclical and airlines have little control over this.
On the flip side, costs are highly dependent on oil prices. Similar to the economy, oil prices are also highly cyclical and airlines have little control over this.
If you add to this mix huge competition from Middle Eastern airlines in the Luxury segment and pricing pressures from the Budget segment, its a wonder how SIA is able to consistently turn a profit.
The biggest disadvantage SIA has over other airlines is that it is not able to count on a domestic market to stabilise earnings. Airlines in large countries like the US is able to thrive due to oligopolies in their domestic markets that help stabilise their earnings. Singapore, being as small as it is, is unable to provide that stabilising effect. As such, SIA is forced to continuously face international competition at every turn.
Much as it pains me to say as a Singaporean, given all these fundamental reasons, I am not thrilled by SIA’s long term prospects.
Financial Review
The good thing for you is that as bond investors, you can put less weight on the business outlook and focus more on the company’s balance sheet and cashflows. This is because you are more concerned about whether the company can pay you or not during the term of the bond, and not the long term value of the company.
Let’s begin by taking a look at the balance sheet. Here’s some data I’ve extracted from 10 years of Annual Reports:
Proforma 3Q19 assumes full subscription of $2b bond programme
OCF BWCC: Operating Cash Flow before Working Capital Changes
As you can see, since 2017 when the company started spending big to upgrade its fleet and in-flight cabin systems, its current ratio (measure of liquidity) and Debt to Assets has deteriorated. Proforma financial impact of the bond issuance is expected to raise Debt to Assets to 24% based on 3Q2019 balance sheet.
If Singapore Airlines continues to spend big on Capital Expenditure, it is likely to deteriorate its balance either through sales of long term assets or further debt funding. Both of which are bad in the view of the bond investor.
However, let’s say you are optimistic that Capital Expenditure is only temporary, would Singapore Airlines be able to fund it’s Debt out of it’s Operating Cashflow?
Below is a schedule of all of SIA’s bonds.
Based on the above schedule, I projected SIA’s debt related cash flows with the addition of its latest bond issue. I
Luckily for you, at no point in the 5 years of holding the bond does the debt payments exceed the 10 year average Net OCF of $2,267m. As such, an argument can be made that the bond is still invest-able.
Are you being fairly compensated though?
The interest rate is honestly fairly low for a company with known defects. If you compare it to the 5 year yield of Singapore Savings Bonds (2.01%) and Temasek Bonds (2.70%), you are being compensated as if the bond is risk free, when it is not.
Will the Government bail out SIA if it becomes insolvent given that Temasek owns 56%? Time will tell.
Final thoughts
Long time readers will know that I’m not a fan of bonds. That said, I’ve blessed certain bond issues like the Singapore Savings Bonds and Temasek 2.70% 5 year Bond as I understand Singaporeans love risk free yields.
The Singapore Airlines 3.03% 5 year Bond is certainly not risk free. Between its poor industry outlook and deteriorating financials, Singapore Airlines is certainly flying through some turbulence.
While I can still find it in myself to bless this bond as an investment (mainly due to its still OK Balance Sheet and Operating Cash flows), I hope investors make the decision to invest only with full awareness of SIA’s issues.
I certainly hope not to see a repeat of the Hyflux saga a couple of years down the road.
Other bond issues I’ve covered
Singapore Savings Bond April 2019 Issue
T2023-S$ 2.7% Temasek Bonds
If you missed my previous post
Starhill Global REIT’s new master tenancy agreements for it’s Malaysia properties
Happy Hunting,
KK
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