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?
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
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.
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