Last week, I met up with an old friend over coffee. She said she bought SIA shares, which I’ve not looked at for a long time.
Curious, I pulled out the charts for SIA and wow…
Shares have climbed up in just over two months. At one point, hitting a S$8.05 peak last month.
This was the highest since COVID hit us in March 2020.
In fact, SIA shares have more than doubled since October 2020. I wrote in my last SIA article I couldn’t agree with the market’s movement…
Was I wrong?
Why have SIA shares soared?
Simply put, the market went ballistics about a booming travel recovery.
According to OCBC Investment Research: “The International Air Transport Association (IATA) recently announced that passenger traffic demand remained robust in Apr 2023. Total traffic (measured in revenue passenger kilometres (RPK)) rose 45.8% versus Apr 2022. Globally, air traffic is at 90.5% of pre-COVID levels, led by domestic traffic which has surpassed Apr 2019 levels by 2.9%.
Meanwhile, international traffic rose 48.0% as compared to Apr 2022, with carriers in Asia Pacific (APAC) continuing to lead the recovery.
In the near term, further travel demand recovery is likely to be supported by the peak travel season in the Northern hemisphere, as well as a more meaningful recovery in outbound travel from China in the second half of 2023.
Going forward, SIA intends to increase its capacity further to around 90% of pre-COVID levels by the end of FY24, as forward passenger sales remain robust across all cabin classes.”
I mean, all these leads to good news for SIA.
More people are travelling – whether for leisure or work…
SIA is ramping up hiring again…
And the fact that SIA’s passenger traffic has reached close to pre-COVID levels.
Source: SIA Financial Presentation March 2023
What’s more, the numbers don’t lie. Recently, SIA published a very positive annual result:
- Revenues jumped over 133% to hit S$17.7 billion
- Net profits grew positive to S$2.1 billion
- Paid a full year dividends
More importantly, SIA said it will buy back half of its Mandatory Convertible Bonds (MCBs). It’s usually a sign the company is confident about its future, improving finances and ability to reduce leverage.
So… was I wrong about SIA shares?
I admit, I missed SIA shares short-term rally. You could argue I’ve made an error with SIA.
But this was largely due to missing out on the market’s big reaction to SIA’s recovery.
And really, I can’t predict whether shares could have risen over 24% in just two months.
My take? I think the market looks at SIA from a short-term, speculative play. Rather than from the lens of a longer term, sustainable outlook.
If that’s the case… with its improving results today, is SIA shares still worth buying?
Can SIA go back up to $12.00 a share?
Well, that was the last time SIA traded in February 2015.
I stand firm with what I wrote about SIA shares back in August 2022…
“First, SIA’s revenues, profits and free cash flow must show a clear, sustained uptrend. Profit margins must improve (showing better resilience to competition). And SIA starts to aggressively pay down debt.
If SIA shows these signs, my hunch is the company would eventually resume its full, pre-COVID level dividend pay out.”
The thing is, I’m not a big fan of airlines.
Sure… SIA’s recent revenues and profits looks like a big turnaround. But the airline industry is pretty much a commodity business.
If I’d traveled for holiday and air ticket prices dropped, I’d rather buy that cheaper ticket with the same standard of comfort. Air travel, after all, is an “elastic good” – a small change in price leads to big changes in demand.
Despite airlines’ lack of pricing power, these capital-hungry giants have to constantly invest in newer, bigger aircrafts, manage volatile oil prices, and grow their expensive labour force.
Source: SIA Financial Presentation March 2023
This leads to one BIG problem…
Airlines have a tough job controlling its high operating costs. And even harder to reasonably predict their profits.
I asked myself then — in the longer term, can SIA continue to build upon its recent success and grow profits?
In the longer term, markets reward share performance from growing profits, not simply on good news.
Over the last ten years, SIA’s revenues, profits were very volatile. It consistently produced negative free cash flow — This meant sinking more capital into the business than collecting cash flow.
Will SIA business do well over the long term? Sure.
Will shares go back to $12? Well, it could be an uphill climb.
SIA needs to work extra hard to compete and maintain profit margins.
These days, competitors can simply buy more aircrafts, increase flight routes and hire more staff just as well. Especially, you have many airlines yet to join the air travel recovery.
I liked what one of the CGS-CIMB research analyst said: “Rising competition from other airlines that are picking up speed in their capacity restoration programmes in FY25F onwards…”
In the longer term, it’s predictable, sustainable profits that drives share price performance.
I’m not sure if SIA could keep up to its promise or the numbers today are just illusory.
How about paying sustainable dividend?
SIA paid a full-year dividend of 38 cents, much higher than 2020. That’s a 5% yield on current prices. It hasn’t paid anything in 2021 and 2022.
SIA has been consistently paying dividends — the bad news is some years it pays more, some years it pays less.
The good news is, however, if you’re looking for a stock that pays you higher than a fixed deposit, then SIA is a perfect choice.
While you may trade frequently on a stock like SIA, if all else fails, a long-term sustainable dividend pay out should pull you through.
But if you’re serious GROWING dividends from predictable economic moat, I’d probably think very carefully about SIA as a dividend payer.
When SIA needs huge financing, it may cut dividends to fund buying aircrafts. That’s something I don’t like.
My final thoughts — growth or dividends?
SIA is a great business, with a wonderful in-flight service. I’m definitely proud to fly SIA as a customer. But whether I invest doesn’t solely depend on that, or what the market might think about its shares in the short-term. What’s important is a business is able to produce a predictable, sustainable profits.
Like what Warren Buffett said, I rather find one-foot hurdles I can easily cross over, than try to clear seven-foot hurdles.
I might missed the boat on SIA shares. But looking back, I don’t regret it. After all, it’s more crucial to have a process of picking businesses — then sticking to it.
The airline industry is not exactly a low-hanging fruit – intense competition, high operating costs, volatile oil prices and so on. SIA might pay 5% yield today, it might not tomorrow.
What’s more, airlines isn’t like collecting rental from a long-term property lease. At least as a landlord, I know my rental income is stable and growing.
Having said, SIA shares’ recent pull back could be a good chance for a short-term trade. However, if you’re looking for growth, I’m not sure SIA gives that. And if you’re looking at dividends, I’d rather look at Singapore banks or Singapore REITs paying more than 6% yield.
What do you think?
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan