There’s a huge difference between making money and spotting a great industry. I’ll get to that in a bit — SIA shares first.
Here’s what you need to know:
- SIA produced far higher revenues of S$1.3 billion compared to last year of S$851 million.
- SIA has narrowed losses to S$409 million, down from losses of S$1.1 billion last year.
- Passenger traffic was rose back to 28% of COVID levels. According to management, “traffic should hit close to 50% of its passengers carried before the COVID pandemic.”
- SIA shares are up 27% since Jan 2021. The market is excited.
Now, if you take a look at the chart below…
This was how SIA shares traded over the last 20 years — mostly sideways.
Source: Yahoo! Finance, Dividend Titan
In the early 2000, the September 11 attack and SARS wrecked SIA. But in four short years, SIA shares rose back to its original level.
The highest SIA shares went was just before the global financial crisis at $20. Back then, SIA’s market cap was S$23 billion.
Everyone thought SIA would be a huge success.
We all know in the short term the market is never logical. It’s the long term that we truly see how the market reflects true business value.
Is SIA shares worth buying now?
The two most important industries in the first half of the 1900s is the auto and airline industries. And if you saw how the airline industry changed the way people think about travelling, you’d get rich.
But very few people actually got rich by riding on the back of the airlines. At one point SIA was carrying millions of passengers, but investors who made money from SIA was little.
In fact, it’s a bad business in a great industry. But it doesn’t mean you’ll make money.
It’s close to 40 years since SIA got listed in 1985. But it’s only in the last 20 years I’ve come to know what the market thinks of SIA. And that isn’t good.
If you’ve bought shares right after it crashed in the early 2000, you’d still have lost money staying the course.
As it turns out, over the past 10 years, SIA’s revenues was stuck at an average S$15 billion per year. Except in 2019 when it produced $16 billion revenues.
Source: Morningstar.com, Dividend Titan
When a company’s revenues doesn’t grow, something is wrong. You see, what fills the graveyard of big corporations is the harsh reality of competition.
Why budget airlines are eating up SIA for lunch
Low-cost carriers dominate the skies. And SIA is getting a lot of heat from overseas expansion of high quality, middle east national carriers.
Even with SIA’s budget airline, Scoot, low cost carriers make it hard for SIA to maintain its market share. And profit margins at the same time.
In fact, SIA’s net profit margins have never gone beyond 6%.
Low cost carriers global market share grew from 15% in 2006, and more than doubled to 35% last year. Paying for air travel is a commodity.
As a result, SIA burnt more cash than it makes money. Since 2012, SIA has only two good years of producing a positive free cash flow of $57 million.
Free cash flow is simply how much the company collects cash from its business minus whatever money it needs to put back into the business to grow. This can be buying new fleet to replace old ones, upgrade systems etc
Source: Morningstar.com, Dividend Titan
As a result, the net worth of the company keeps going lower and lower.
The net worth of a company is the amount of profits its has accumulated over the past years. The higher the net worth, the more valuable the company is. This is called book value.
That’s why shares are always trading at a discount to its book value of S$7.50 per share.
But that’s not all.
SIA borrowed a massive debt to tide through the past year.
Note: SIA still has S$14 billion worth of debt that needs to be paid back.
In fact, the amount of interest cost is enough to eat up even more of its revenues. In 2012, SIA only had to pay interest of S$70 million a year.
Last year, that ballooned to an interest cost of S$2.5 billion a year. That’s massive.
Can SIA pay sustainable dividends?
SIA’s dividends haven’t been too smooth. It paid S$0.35 per share in 2012. But it has not grown that amount since then.
Even if dividend investors like myself want to continue holding onto the stock, it doesn’t make sense that this is a viable dividend play.
The thing is SIA is one of my favourite airlines. It has comfortable economy seats and the air stewardess are lovely. But if you ask me if it can make good money in a great industry like airline, I’m thinking twice.
At S$5.52, I still don’t think the stock is cheap to buy. I’ll pass.
Sometimes investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
Good analysis. I share the same view.
I share your same view.
Cool, thank you!
Willie