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) | SGinvestors.io 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).



SIA to raise up to S$15bn in capital…



…which is very significant and ensures it will thrive post-Covid-19

  • 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.


We cut our target price to S$6.27

  • 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.


Exercise to be completed in 3-4 months

  • 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.


Capital raised can cover about one year’s worth of costs

  • 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.


Rights issue is the most efficient way of raising cash quickly

  • 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



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