May 2020 Portfolio Update

S&P 500 Index Fund -5.18%
Straits Times Index Fund -20.62%
Tracker Fund of Hong Kong -18.21%
My Portfolio -2.31%

Transaction made in May 2020:
For mum's portfolio:
Small initialization in OCBC
Increases in Perfect Shape

For personal portfolio:
Increases in Perfect Shape
Slight increase in Mapletree North Asia Trust

Huge improvement over last month was attributed largely to the price recovery of Xinghua Port and TTJ holdings, and marginal increase of Perfect Shape. Paper losses in Southwest Airline pare in recent days, as domestic travel seems to pick up again. Unfortunately I did not average down earlier: this shows you my conviction in this idea is piecemeal and insignificant.

The SIA Situation

I am sure most local investors are aware of the details of this SIA "rescue package" by now.

There are many local writers and sites whom had put in the hard work to explain to (pitiful) SIA shareholders, of their options, and the various deadline, prices, etc. This post will not attempt to do the same, especially when I am not capable of it.

My objective is to point out whether the rights/MCB will likely make you money, and make some (very) bold predictions on the coming future.

TL:DR:  I think there are better opportunities out there, unless these MCBs are available at very depressed prices.

I am still unclear about the following:

• Will the MCB trade in the market? My assumption is no, which is regretful because I do not think they are attractive at par.
• Should the MCBs NOT get redeemed, what exactly is the conversion rate? Market prices at year 10, or 373 maximum of shares?

It is anyone's guess how much the company is worth in 10 years!


Why I am not looking at the Rights Issue?
Rights issues are basically discounted stock for existing share holders. IMO, one should only subscribe when the company, during "normal times," is profitable, and capable. Based on the numbers since 2007, SIA is an extremely poor business.

In other words, it only makes sense to subscribe to rights if the problem is going to be temporary. Looking at the numbers over a decade, I do feel that the business is poor, or worse, the management is prone to taking huge risk.

So if you were to ask me to buy more stock, abeit discounted, of a company that is not efficient, the odds are poor that it will be profitable, long term (4-years is my perspective of long term).

Pre-crisis, SIA has about 1199.851millions of shares. It was trading at $9, which means its market cap is about 10.8B.

Based on an Enterprise Value approach, it has about

• 3 billion worth of liquid cash/investment,
• 9billion dollars of debt. 
• That translate to a total Enterprise Value of 16.8 billion dollars (market cap + debt - cash). 

It has to be earning 1.1B of Free Cash Flow yearly (15x is fair value imo), which it has never been able to do so consistently. The average over 12 years is a negative value.

I believe SIA to be a lost cause as a shareholder, no matter how much it was priced in the past.

Is present debt the worry for SIA?



I am going to use simple estimates, since nobody knows for sure.


SIA has about 3 billion worth of cash + investments. SIA has about 800m of "Associated Companies" on book. A quick look at SIAEC and SATS reveals that they are not in bargain price category, so it is unlikely to be worth anything more.

It has about 9B worth of debt. Which.... sounds worrying. But it isn't.

This is what I saw in 2018-9's annual report.

If we assume this dark period to last for 3 years (conservatively speaking, since everyone expect a vaccine in 2021), under date repayable,
-500m, to be repaid on Jul 2020
-200m, to be repaid on Apr 2021
-600m, to be repaid on Oct 2023
That is a total of 1.3B in three years time.

What happens if we stretch the timeline to 4 years?
-750m Mar 2024
-300m Apr 2024.
That is cumulative total of 2.15B in four years time.

What about operating lease commitments? The total, after 5 years, is 2.3B.

Inclusive of debt, that total up to about 4.5B. Add in interest payment of about 200m a year, that is 5.3B.

The problem isn't the debt

In short, looking at the total sum needed for 5 years of lease obilgation, 5 years of interest payment, and 4 years of debt maturing, the debt is the least of their problems. This rescue package totaled 8.8B. Furthermore, the company indicated that about 4B in secured financing is available by pledging their unencumbered aircraft (See below screen capture).

IMO, the only easy money-making opportunity was the publicly traded perpetual bonds, and that opportunity had passed.

The bear in the room is the yearly expenditure
SIA has an analyst media presentation , on page 9 whereby the capex is dissected.
The big numbers are coming from fuel hedges, staff cost, and depreciation and lease charges for aircraft.


More worrisome is the fleet renewal on page 18, where it should cost SIA about 5B yearly for the next 5 years.
In their presentation slides for raising rights and MCB, they claim to put aside 3.3B in capex, however, I have no idea how many years of capex is this sum for. I going to assume this will last 1 year at most.

I going to guess that the follow will happen
a) Dividends is going to be withheld for a handful of years. This would save them about 350million yearly.
b) They will issue additional MCBs, in view of the capex requirements and planes on back order. I think it is unlikely for them to issue 6.2B immediately, but the likelihood is it should be utilize within 2-3 years.
c) Increased secured financing, or sales and leaseback of any airplanes available-- but who is going to buy? As mentioned by management, this will net them 4B.
d) Restructuring for staff. I pray for them.
e) The 2nd tranche of MCB might not happen if the current ones are not well-received.

There is a slight chance that SIA might divest part of their associated companies holdings, albeit unlikely.


Conclusion
From the looks of things, it is likely that SIA will be solvent for 3-4 years down the road, with visibility of the future within a year. This is the uncertainty. The capex is the issue


It will benefit the company and MCB holders that the interest rate to remain low for the next 3-4 years.It is common sense that risk-free interest always affect prices, but another 10 years of low interest environment? I don't know how likely is that. But should bank interest rate be substantially higher, it will be logical to utilize cheaper capital.

To make things clear, what I am saying is, given limited cash, one would redeem the more expensive debt. If borrowing from the bank is cheaper (i.e. higher SIBOR), of course they are going to redeem the MCB. Else, it would cheaper to just let the MCB lapsed into equity.

It does not make sense for Temasek/SIA to redeem the MCB just to score political points. A CAGR of 6% for 10 years doesn't make sense, especially when the end-game is share dilution involving a poor business

I will be keeping my eyes peel on the amount of rights and MCBs that Temasek have to back-stop. I suspect SIA would likely get privatized under a stable political climate.

As of now, the lazy-man thinking is that, with Temasek, the MCB will surely be redeemed. But...

I think there are better opportunities out there, unless these MCBs are available at very depressed prices.

April 2020 Portfolio Review

Overview
S&P 500 Index Fund -8.36%
Straits Times Index Fund -19.71
Tracker Fund of Hong Kong -13.31%
My Portfolio -8.38%

Transactions
-Purchase of Lendlease REIT.
-Purchase of another company in Hong Kong with strong cashflows, mainly for its dividends.

Commentary
Market seems to have recover tremendously, especially REITs. The fear of their investment properties getting revaluation, the pressure of enforcing distribution for tax purposes, have eased. Unfortunately, I am one of those who were cautious of these two issues, and did not double down on them during the sell down. Some of them were marked as much as 40% down.

TBH, I was waiting for a rights issue.

Unfortunately, the G decided to intervene and REITs do not have to distribute 90% of their income until March 2021. In certain ways, it reflects the G's expectations that things should more or less recover by Sep?

Market movement in recent period reminded me of the ironies of life. Last year, investors who are very optimistic (and naive, to the point of borrowing /on margin) about REITs earn spectacular returns on them. Many of them thought they were geniuses, but fled like cowards when REITs were sold down. Some even sold stolen ideas while giving some lame-ass excuses. Hilarious.

The market always have a way of revealing one's conviction. It is what you do that matters, not what you said.

My conviction in Southwest Airlines (SA) is not too high, other than the fact that they have probably the best ROIC among all airlines. However, by choosing to receive aid from the government, they are disallow to purchase shares, give out dividends, etc until September 2021. That means we are looking at 1.5 years of misery in this sector. I am assessing the situation slowly to see if this is an opportunity.

The purchase of Lendlease REITs is based on 2 simple ideas:
1) It has 2 years before they have to re-finance; in other words, they have no current interest-bearing liabilities
2) It is a small REIT and hence it is easier to grow. How do REITs grow? Purchasing properties and increasing rent, of course.

Till next month.

***
What a difference a few days could make.
As of 11-May-2020, the market treated me really well, as prices for XHP and TTJ recovered. I am a little suspicious of TTJ's resurgence as the volume of shares is not significant.

Let's hope it stay this way.