Thursday, February 23, 2017

Stock Review: Singapore Airlines

Singapore Airlines (SIA) is hallmark of Singapore. The brand name itself probably is royalty worthy. We know their business took a hit when the budget airlines entered the market and their hey days were a thing of the past. At their current price of $9.90, is it a value buy?

Usually, the first metric I look out for in a services company is profit margin because these companies usually rely on staff to earn their income. In a service business, premiums are levied, and customers pay if the customers are willing to. As long as they can find enough customers to happily and repeatedly pay them premiums for their services, it's a good business.

Profit Margin
According to the latest financial report, net profit margin is 5.1% for 9 months (568.3M/11,148.5M), which is lower than the previous year's 5.3%. This means that they spend $95 to bring in $100. One thing I don't really like is that fuel costs forms $26 out of the $95. When fuel cost is something we have no control over, we need a fatter margin to cushion the increase in fuel costs..

Return on Assets (= Net Income/Total Assets)
As SIA buys aircrafts and it forms a large part of their assets, which also depreciates a lot, the next important factor to me is the return on assets, which means how efficient SIA is to generate income from its aircraft assets. ROA is 2.6% (568M/21,660M), which is rather low to me. This basically means that for every $100 of assets on their balance sheet, it is earning $2.60 of income. Fancy it like a CPF account. The number will be higher if we exclude some assets, but it won't tilt the scale much.

Dividend Sustainability
Yes, they have a lot of cash, but they also have a lot of debt. Are they paying their dividends with debt or income? We look for companies that have their Free Cash Flow per share >> Dividend per share. This is like saying you need to earn more than you spend to be debt free. FCF per share is -$0.76 versus a Dividend of $0.44. You don't want your parents to borrow money $76 just to give you $44 right? Anyway, SIA's FCF has been negative from 2012 to 2016. FCF was $0.048 in 2011. They probably emptied their warchest in 2011 with the $1.30 dividend. Will they payout $1 dividend again? Well, I don't know, but if they do, I am quite sure they will need to take on a $1.2B loan.

Overall, SIA isn't attractive at $9.90. If I have to give a rough stab on a price I will consider buying SIA, it's probably $5, based on $0.20 dividend and 4% yield. If you are just riding the waves and following the tide, it doesn't really matter which stock you buy (gamble with).