You’re in for a special treat today, we have a guest post from an experienced analyst.
And it’s about a stock which I’m sure you’ll recognize, the Singapore darling, Singapore Airlines!
This stock is at levels not seen since 1998, here’s a quick peek at the weekly chart.
Singapore Airlines Ltd, the SQ brand synonymous with The Best Airline, The Best Crew, The Best in whatever-you-can-think-of-in-the-air, is facing unprecedented headwinds in almost 5 decades of existence. All the awards amounted to nothing when borders are closed, and people just cannot travel.
If this situation continues, shareholders of SIA are expected to lose $1.3bn every quarter, equivalent to $430 million every month. Here’s the mathematics just by back-of-the-hand calculation using April – June 2019 results as a reference. SIA’s financial year ends in March. Hence, the April to June period corresponds to the first quarter of its financial year.
For shareholders, SIA wipes off $1.1 per share every quarter. Before the CoVid19 became a pandemic that jolts the global economy, we took the share price of SIA on Dec 31, 2019. It was trading at $9.04. As of writing on Apr 1, 2020, the stock changed hands at $5.54. Covid19 has shaven $3.5 off SIA.
On the book as of Dec 31, 2019, SIA had $12,150mn, or about $10.10 per share. Prior to the crisis, SIA was already trading below its book value at 0.9x P/B. Assuming this discount widens to 0.8x P/B (on the back of equity dilution in the rights issue), the current market price equates to $6.9 of book value. The difference between $10.10 and $6.9 is what Robinson Street (instead of Wall Street) thinks SIA would lose to CoVid19. By calculation, it takes 9 months of 96%-capacity-cut to justify the price weakness, assuming every 3 months erased $1.1/share of the equity value.
We have cleared one month in March. “Robinson Street” expects SIA to resume normal operations by December 2020. Key markets in Europe, US, China and the Australia-New Zealand need to open.
While Europe and the US are mired deep in the pandemic, it is evident from the news reports in China (up to you to believe or not) that the coronavirus can be overcome. Social distancing is the last defence against the virus when no vaccine is yet available. The political and economic costs of not opening the border may knock sense in key decision-makers that the lockdown cannot persist. The quarantines and social distancing is to “flatten the curve.” I’m optimistic this curve can be flattened. There are many countries with successful experience for others to model.
In time to come, SIA would soar the sky again. Whether they will be profitable or not is not a key driver of the share price now. Sentiments have overridden fundamentals for now. The recapitalised balance sheet of SIA is sufficient, in my opinion, to weather the viral storm. Commitment from the government, one of the wealthiest in the world, to protect the national pride means that SIA is highly unlikely to go belly up.
Think about what jokes others would make on Singapore when we could afford the world’s most advanced fighter jets (recent purchase $3.7bn in January 2020), but can’t keep the nation’s commercial airline in service. No, the joke is not going around anytime soon. Temasek gave the in-principle approval for the rights issue and bond issuance, raising some $15bn capital last week.
SIA looks decent for a sentiment-driven rebound. The price discount it suffered does not seem to justify the support it has from the government. So, jump on board SIA now before it takes off again. For all you know, SQ Business Class ticket is right here for your taking.
If you’d like to learn more about a system you can use to time your entry on SIA, click the banner below.