Singapore Airlines (SIA) - CGS-CIMB Research 2020-03-27: Capital Raising To Strengthen SIA For Long Haul; Strong Shareholder Backing To Support Revival

SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Airlines (SIA) - Capital Raising To Strengthen SIA For Long Haul; Strong Shareholder Backing To Support Revival

Singapore Airlines is proposing an equity rights issue and convertible bond issue for a total of S$8.8bn, with an option to issue another S$6.2bn in convertible bonds.
The capital raising is very significant against its 31 Dec 2019 equity base of S$12bn, and will ensure Singapore Airlines survives and thrives in the post-Covid-19 period.

Maintain HOLD, but we cut core EPS forecasts and reduce our target price to S$6.27 (still based on 0.86x P/BV, 1 s.d. below mean since 2011).

Singapore Airlines (SGX:C6L) proposed today to undertake a 3-for-2 rights issue of 1,777.7m new shares at an issue price of S$3 (53.8% below the closing share price and 31.8% below the theoretical ex-rights price of S$4.40) to raise S$5.3bn. It also proposed a rights issue of mandatory convertible bonds (MCB) of S$3.5bn on the basis of 295 MCBs for every 100 shares.
In addition, Singapore Airlines will seek shareholder approval at a to-be-convened EGM to issue a further S$6.2bn in MCBs within 15 months from the EGM.
Altogether, Singapore Airlines has the potential to raise up to S$15bn in new capital, comprising S$8.8bn this year (S$5.3bn in new rights shares and S$3.5bn in MCBs), plus S$6.2bn in additional MCBs over the next 15+ months.
Temasek, as the 55.5% shareholder of Singapore Airlines, has given an undertaking to subscribe for its portion of the rights shares and MCBs, and also to subscribe for any undersubscribed portion, meaning that the success of the exercise is assured and Singapore Airlines will not need to arrange for investment bank underwriting.
Separately, Singapore Airlines will also secure an S$4bn bridging loan from DBS to ensure liquidity.
See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.

This capital raising is very significant against its 31 Dec 2019 equity base of S$12bn, and its current base of 1,185m ordinary shares will increase 2.5x to 2,963m shares.
The MCBs are only convertible at their 10th year maturity; hence dilution is a distant concern. The zero-coupon MCBs are redeemable at the option of Singapore Airlines, and the implied yields depend on the timing of the redemption; redemption up to end of the 4th anniversary will carry a yield of 4% p.a., increasing to 5% yield in Years 5-7 and 5% in Years 8-10.
We view the capital raising as essential to handle the Covid-19 crisis and will ensure not just Singapore Airlines’s survival, but also increase its future probability of thriving against its competitors.

While the MCBs will be treated as equity on Singapore Airlines’s balance sheet, our view is that Singapore Airlines will probably want to redeem the MCBs if possible. Hence, for the purposes of deriving our target price for Singapore Airlines, we have treated the MCBs as debt, and not as equity.
Under this assumption, we forecast the post-rights BVPS of Singapore Airlines to be S$4.94, which we gross up by a factor of 0.68 to derive the cum-rights BVPS of S$7.30. Against this, we apply our multiple of 0.86x to derive our cum-rights target price of S$6.27.
For detailed calculation of cum-rights target price, click view full report button below for more.

The rights issue of S$8.8bn proceeds (new shares of S$5.3bn and MCBs of S$3.5bn) is expected to be completed in 3-4 months, following which the DBS bridging loan of S$4bn will be repaid.
A potential issue of an additional S$6.2bn in MCBs depends on the trajectory of Covid-19, and it will be issued only if absolutely necessary.

About 40% of Singapore Airlines’s operating costs are fixed in nature (i.e. around S$4bn p.a., or less given cost savings initiatives), counting in fuel hedging losses which cannot be avoided. Only 20% of its total group staff costs of S$3bn p.a. are variable as these comprise crew flying allowances.
Singapore Airlines will set aside S$3.7bn from the S$8.8bn rights proceeds to cover about one year’s worth of fixed operating costs.
Separately, Singapore Airlines will set aside S$1.8bn from the rights proceeds to cover debt and lease liabilities payments and interest expenses. This should cover Singapore Airlines's S$1.5m annual cash outflows in this regard.
Finally, Singapore Airlines will set aside S$3.3bn from the rights proceeds to cover capex.
Singapore Airlines’s previous guidance of capex commitment was S$6bn for FY21F, with the difference to be financed separately via secured borrowings. Singapore Airlines is unable to negotiate delivery deferrals at short notice as the agreements with aircraft manufacturers do not give Singapore Airlines such flexibility.

Singapore Airlines is proceeding with a rights issue as this can effectively raise a lot of cash quickly.
Although Singapore Airlines has S$13bn-14bn in unencumbered aircraft, it cannot sell and leaseback (S&LB) more than S$4bn in aircraft value due to certain negative covenants. And currently, appetite among lessors for new S&LB deals is poor, so Singapore Airlines estimates it can only raise S$1bn at the very most through S&LB. Hence, a rights issue is the best way forward, and also important to put Singapore Airlines in a strong position to be able to immediately redeploy its aircraft once the Covid-19 pandemic passes.
For forecast changes, click view full report button below for details.

Raymond YAP CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-27

SGX Stock Analyst Report HOLD MAINTAIN HOLD 6.27 DOWN 8.000