Singapore Airlines, our pride and glory. One that has been consistently ranked among the best airlines in the world each year. Undoubtedly, it is one of the best investments made by the government, but is it a good investment for retail investors?
In this report, we analyse their business, latest financial year results, current valuation and discuss if Singapore Airlines (SIA) is still a good Singapore blue-chip stock that you should invest in.
How does Singapore Airlines make money?
1. Passenger Service
Passenger services accounted for the majority of the company’s income before the pandemic, accounting for 80.5%. It is worth noting that SIA runs one of the world’s youngest fleets, with the average age of the entire SIA group being 5-6 years old. There are two sides to this coin. The negative side is that operating a younger fleet would result in higher capital expenditure since it would constantly need to refresh its fleet. On the other hand, a younger fleet could result in more cost savings from fuel-efficient planes and a more pleasant journey for passengers, which may benefit the firm in the long term.
The Passenger Service is further subdivided into two parts. Scoot and Singapore Airlines*. Singapore Airlines is the flagship carrier, linking Singapore to the rest of the world, while Scoot is a low-cost airline that mostly serves Asia and Australia.
* As of January 2021, SilkAir has officially merged with Singapore Airlines, which marks the end of the Singapore Airlines regional wing.
2. Cargo & Mail
SIA Cargo & Mail, which previously contribute a small portion of the company’s total revenue, has been a lifeline for the company during the pandemic, contributing 66.3% of total revenue, up from 12.2%. This growth is mainly due to the steep decline in passenger flights, but can also be attributed to the management decision to convert passenger aircraft for cargo deliveries.
Currently, SIA Cargo & Mail transport a diverse wide array of products worldwide, including fresh groceries, chilled meat, personal protective equipment, medical supplies, and pharmaceuticals.
3. Engineering Service and others
SIA Engineering Company is a subsidiary of SIA that provides maintenance, repair, and overhaul (MRO) services at 30 airports in seven countries. Unfortunately, the drop in operational flights during the pandemic has impacted its business since fewer aircraft are being serviced.
Why did SIA share price drop?
Operating an airline costs a lot of money.SIA has gone through many rounds of debt and stock financing during the pandemic to remain afloat, with the most recent issuance on 19 January 2022 where the corporation issued US$600 million of 3.375 % notes due in 2029.
Other notable capital raising over the past can 2 years are listed below. If you are interested in seeing how such capital raising has affected SIA valuation, check out these articles:
- May 2020 –$8.8 billion of rights shares and Mandatory Convertible Bonds (MCBs)
- November 2020 –$850 million of convertible bonds
- November 2020 –$500 million from private placement bondsJune 2021 –$6.2 billion of MCBs
Is SIA stock a buy now?
Singapore Airlines has evolved into more than simply a profit-maximising enterprise. It is of national importance and has brought about numerous intangible benefits, which have been and will continue to be considered in its business strategy moving forward. While such decisions are beneficial to Singapore, they may not translate into shareholder returns, even if the firm enjoys substantial government support via Temasek.
As the world gradually opens up again and returns to normalcy, the industry will recover. I have no doubt that Singapore Airlines will outperform its rivals in this region since it has used the pandemic to strengthen its operations.
SIA stock price may begin to rebound from here. Nonetheless, SIA operates in a highly competitive market with small margins, making it an unattractive investment.
Are you looking to invest in SIA? Share your thoughts in the comments below!
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