Why I won’t put any money down on SIA

In the past month, 2 different people close to me told me they have Singapore Airlines in their investment portfolios. I got a little curious and asked more about their thinking process. I decided it was interesting enough to write it down.

Here’s the rough reasoning behind their thesis.

1. Among the big blue chips listed in Singapore, SIA is one of the few companies that have not recovered to their pre-pandemic prices. Therefore, it is cheap.
2. SIA is backed by Singapore’s Government. The Government won’t let it fail.

I think an investment thesis based on these 2 assumptions is very weak. Before I proceed, I will make a disclaimer that I am merely a man-on-the-street investor. I am not a certified financial advisor. Don’t buy or sell stocks based on some random guy rambling on the internet.

Here’s how I view the 2 assumptions.

Assumption 1: The stock price is still very low now. It will recover to pre-pandemic prices

Factually speaking, it is true that SIA’s stock price is low compared to the past. Before 2020, each share of SIA was trading around $9.00, versus roughly $5.00 today.

2 year history of SIA share price

However, thinking about a stock’s price by itself is meaningless if we don’t set some parameters to compare against. To clearly illustrate what I mean, suppose you wanted to buy some Coke for an upcoming party.

You go to a supermarket and see that they are selling Coke in bottles and cans. Here are the prices.

• Bottle: $2.40 each
• Can: $0.80 each

If you thought “The bottled coke is 3 times as expensive as the can?!?!?”, you are making an elementary mistake. Without knowing the volume of Coke sold in the 2 forms, you can’t make any meaningful comparison.

I’m in Singapore, so I will use the common volumes that Coke is sold by here. Bottles usually go by 1.5L each and cans are 320ml each.

• 1.5L bottle: $2.40 each. ($0.16 / 100 ml)
• 320ml can: $0.80 each. ($0.25 / 100ml)

Using this comparison, you will see that the bottled Coke costs significantly less than the canned version. To drink the same volume of Coke, you need to spend more money when you buy the can, compared to the bottle.

Let’s go back to SIA. In line with the Coke example, we need something in order to keep comparisons the same. In this mental exercise, I shall decide to use 100% percentage ownership of the company as the base unit for comparison.

Let me stretch your imagination and pretend I have a couple of billion dollars lying around and I am interested to buy 100% of the common shares in SIA with this money. The relevant figure I will have to inspect is the market cap, given by the brown line below.

Data for SIA. Taken from TIKR.com

Eyeballing the market cap in the graph, it typically used to cost around $12B – $13B Singapore Dollars to buy over all SIA common shares in the last decade. Despite a crushing drop in revenue and profits in 2020, something funny happened.

The total bill to pay for SIA has gone up! In order to buy all common shares in the company, the total bill is around $15B now.

If we zoom further out, the situation is even more pessimistic. The bill to acquire all common shares is now at a 8-year-high while net income is at a 10-year-low (see the gray line above)!

Is your can of Coke still cheap now?

I’ve said it before and I am going to say it again – stock price alone is a meaningless number. The number of shares increased roughly 2.5-fold after last year’s rights offering. That means each SIA share I own in 2021 is only entitled to 40% of the voting rights and claims to future profits as compared to a SIA share in 2019.

On top of this high price to acquire the common shares, there are some complicated hocus-pocus floating around, called the MCBs or Mandatory Convertible Bonds.

I won’t go into the exact details of the MCBs as they gave me a headache. Some smart people enlightened me about the MCBs here and here. I will just write my layman’s understanding of the whole situation.

SIA borrowed money from the MCB-guys (people who hold the MCBs) last year and therefore owes them principal plus an accrued interest every year. At the end of 10 years, if SIA can’t fulfill the MCB coupon and principal, SIA will just magically create new shares out of thin air to give the MCB-guys. This grants SIA the ability to borrow money, without the typical downside risks of debt.

To put it more explicitly, SIA can’t go bankrupt if there are no interest payments to be made with cash on the loan. Furthermore, SIA can’t go bankrupt from the MCBs since the creditors are willing to accept arbitrary pieces of paper called SIA-shares as payment too!

Even better, the accrued interest that is supposed to go to the MCB-guys are not an expense. Every year that it is held, the accrued interest is added to equity (read: profits!).

So far so good, but what’s the downside to common shareholders?

If I buy SIA shares, I am a common shareholder and I give zero ****s whether the MCBs fits the academic definition of an equity or debt instrument. All I care about is that even if I own 100% of SIA’s common stock today, some of the firm’s profits going forward will be diverted to pay the MCB-guys in the future. Worse, if the company fails to do well in 10 years, I have to **gags** create more shares at the end of the day to split the company with someone else when the MCBs expire.

No choice, the MCB-guys helped save the company. I guess I have to give it to them.

Or I can perhaps choose not to buy these SIA shares with my spare billions in the first place.

Assumption 2: The Government won’t let it fail.

There’s some truth to this assumption, I think.

Having a national shipping line is absolutely important to the survival of Singapore’s port. Because of that, the Government won’t let NOL fall.

Having our own water reverse osmosis plants is absolutely important to Singapore’s water security. Because of that, the Government won’t let water processing pioneer Hyflux fall.

Oops. Sorry, I got confused. I forgot NOL got acquired and Hyflux just went bust. Wrong story. Let me rewind a little.

Having a national airline is absolutely important to Singapore’s tourism industry and prestige. Because of that, the G won’t let SIA fall. Right?

**Nervous laughter follows**

Right?

😂