This isn’t like my normal analysis but I will try to do abit of this kind. SIA really grabbed some of my readers attention because of its recent price movement.
Technical Chart of SIA
SIA stock price looks to be peaking and judging by the movements at the SMA this is a time to evaluate taking profit or selling to collect lower.
But I got a gut feel the likely movement will a gyration between $13.00 and $15.00
Many investors would be interested in this counter. Its one of the most well operated Airline and its got a good set of subsidiary including SIA Engineering.
Current Valuation of SIA
SIA have not finish reporting FY2011 but this work year have been great in that they rebounded from a much disastrous 2010.
I forecast that baring any big changes in the 4th quarter,
Operating Cashflow for FY2011: $3809 mil
Operating Cashflow FY2010: $1966 mil
Average Operating Cashflow for past 10 years: $2350 mil
Average Operating Cashflow for past 3 years: $2612 mil
Current Market Cap at $14.02: $17581 mil
Current Cash Holdings – Debts: $7332 mil – $2243 mil = $5082 mil
Current Enterprise Value (EV): 17581 – 5082 = $12499 mil
EV/EBITDA FY2011: 3.28 times
EV/EBITDA FY2010: 6.38 times
EV/EBITDA Avg 10 yrs: 5.31 times
EV/EBITDA Avg 3 yrs: 4.78 times
I think if we based on FY2011 forecasted cashflow it’s a bargain at 3.28 times operating cashflow. But the question is how common is $3809 mil.
A more realistic forecast should be taken with last 3 or 10 years operating cashflow and it is 4.78 times and 5.31 times respectively.
I think it is still a good price to buy as I don’t think Singapore Airlines will be a going concern for the next 5 years.
Free Cashflow for past 10 years
Here is something interesting. Take a look at FCF-DIV. That is essentially operating cashflow minus capital expenditure minus dividend payout.
Mark of a good dividend company is always to payout their dividends from free cashflow (FCF).
So it is a surprise to see that FCF-DIV is negative most of the time.
Average FCF 10 yrs: –$599 mil
Average FCF 3 yrs: –$266 mil
It is a small free cashflow bleed but it means on average they been bleeding that for 10 years.
Debts issued /retire
What is astounding is that it should be balanced with more debts issued (darker blue line) to pay for this free cashflow shortfall but the trend is that they are retiring more debts then issuing!
Because of this Total Debt (purple line) have been reducing to nearly 1 billion. Which is very very safe. That is pretty much covered by an average of $3 billion cash holdings.
So if they are bleeding free cashflow and not issuing debt, why is the Cash Holdings (green line) climbing like mad!
Other Investing Cashflow
What I realize is that SIA got a large injection every year from items in the Investing Cashflow (light blue line)
This is a consolidation of:
- Purchase of intangible assets (negative)
- Proceeds from the disposal of aircraft and other properties (positive)
- Disposal of short term investment (positive)
- Investments and Acquisitions in associated companies (negative)
- Disposal of subsidiary (positive)
- Dividends from subsidiary and investments (positive)
- Interest on investments and deposits (positive)
Without this category, they would not be where they are today. I cannot pin point the exact figures but dividends and disposals of subsidiary like SATS and SIA Engineering makes a whole lot of difference.
Here is what I got:
2007 they got a particular high surge in this area of $2781 mil. This is made up of:
- $1586 mil Disposal of aircraft and fixed assets. In particular SIA building
- $382 mil Disposal of long term investments
- $509 mil Disposal in joint venture company
- $280 mil Dividends, Interest
2009 their other investing cashflow was rather low ($484 mil). This is made up of:
- $893 mil Disposal of aircraft and fixed assets.
- -$457 mil Acquisition of subsidiary
- $252 mil Dividends, Interest
As a summary factoring this amount, you can then see why cash holdings have been climbing.
FY2011 Dividend Yield based on $14.02: 2.17% ( $382 mil)
That is not a very attractive yield, but a look at dividend payout trend (green line) have shown that it is climbing before dropping like a cliff in FY2009.
On an average the last 10 year pay out is $500 mil which is around 2.84%
Average last 3 years pay out is $900 mil which is around 5.12%
On an average Free Cashflow + Other investing cashflow for 10 years is $1123 mil and 3 years is $1300 mil
That is 6.3% and 7.3% yield respective.
What this means is that paying out 5% base on current share price is safe for SIA based on the operating scenario for the past 10 years. They will still be adding 200 mil to cash.
As a dividend investor, this stock might be not good if you are looking for regular income payments. Its gonna pay you only in spurts.
Rather unique is for an airline stock, Capex have been reducing. What does this mean? Does this mean that asset base is shrinking? Or does that mean cost and efficiency of new aircraft is improving?
Either way, CAPEX have to pick up sooner rather than later and I believe it is not a concern for SIA.
Gross and Net Profit Margins
The cost of operations have been increasing steadily. That together with the influx of low cost carriers and high oil prices have eroded gross margins. The gross margins have based at around 30%
However, Net Margins have been eroded still.
Higher Fuel Expense Track Oil Price
Seems everyone is certain that higher oil prices and high capex is the bane of an airline stock.
But rising oil prices and fuel prices is not new. Oil prices have been rising and peaking at 2008. This should be reflected in FY 2009 figures.
True enough there is a dip in revenue, profit and income not to mentioned a surge in total expense.
But what about in FY2010? 2009 saw a dip in oil prices but the problem for SIA is not high oil prices but falling air travel due to recession creating low business activity.
Judging by this, which is worse? High oil prices or low business activity? I should think it’s the latter based on the figures.
The rational is this: If you know that fuel cost is a major expense and fluctuating prices will do you in, you will hedge in advance.
The problem in 2008 is probably the rate of change in fuel price is such that hedging becomes less effective.
The greater danger: Recession and Low cost carrier. That is what happened in FY 2010.
I think operation wise, SIA is very sound.
- Its at an attractive valuation
- Its dividend payout is low but really if they tackle their problems they can pay an average 5% yield
- Dividend payout is inconsistent. There is room for large dividend payout speculation this year.
- Using free cashflow to analyze its ability to pay is problematic. Do factor in other investing cashflow
- Economic Moat is shrinking with low cost carrier entry. What SIA needs to do is ensure that Tiger Airways, which is a subsidiary becomes the most competitive low cost carrier.
- But eventually it means margins will shrink since low cost carrier have lower margins
- Technically, 20 day and 50 day ma cutting 200 day ma. If you have fat profits it might be wise to take some off the table. If you want to get vested, wait a while to get in.
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