Singapore Airlines (SIA) - UOB Kay Hian 2020-03-30: Lender Of Last Resort To The Rescue

SGinvestors.io

SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Airlines (SIA) - Lender Of Last Resort To The Rescue

• As expected, Temasek has stepped in as a lender of last resort and availed Singapore Airlines of substantial liquidity. This should alleviate default risk but Singapore Airlines still faces a challenging environment. There is also the risk of funding requirements for its airline associates.
• Still, we have assumed a blue skies scenario with expectations of a recovery in traffic in Q2FY20.
• Maintain HOLD. Ex-all target price: S$5.80.
• Suggested ex-all entry level: S$5.20.

WHAT’S NEW

SIA to raise up to S$15b in new capital from a rights issue and zero-coupon 10-year mandatory convertible bond (MCB).

• The MCB can be called by Singapore Airlines (SGX:C6L) in full or in part every half yearly. It will have a redemption value of S$1,806.11 or can be converted into equity at the relevant conversion price, which presently stands at S$4.84. The yield to call on the MCB will be 4% for the first four years. 5% for the next three years and 6% for the remaining period. See Singapore Airlines Announcements.
• Temasek, which owns 55% of Singapore Airlines, has given an undertaking to take up full pro rate entitlements to rights and MCB along with excess rights and MCB.

We assume SIA will raise S$8.8b and not the full S$15b.

• Singapore Airlines has indicated that 42% of the S$8.8b will be used for operating cash flow, 38% for capex and the balance for debt service and other contractual payments.

Accounting regulations allow MCB to be treated as equity

• Accounting regulations allow MCB to be treated as equity, in which case, book value per share for FY21 will be S$6.40 on a fully diluted basis (2,962.9m shares). However, we adopt a more conservative approach and treat the bond as 50% debt and 50% equity. Book value, in this case, will amount to S$5.80 per share.

STOCK IMPACT

SIA’s right issue at a steep discount is highly dilutive to shareholders.

• Still, the rights issue along with the MCB reduces default risk substantially. On that basis, we value Singapore Airlines at 1.0x FY20 book value, after treating 50% of the MCB as debt and 50% as debt.
• A more conservative approach would value the debt portion on a 10-year SGS yield basis and the remaining portion as equity. If so, the debt:equity split would be 64:36, or S$2.2b treated as debt and S$1.3b treated as equity.

EARNINGS REVISION/RISK

• Minimal changes to our earnings estimates, aside from factoring in lower interest cost, arising from capital infusion and marginally higher interest income.

VALUATION/RECOMMENDATION

• We lower our fair value from S$6.60 to S$5.80 (ex-all target price). We revise our valuation methodology from SOTarget Price to a straight forward multiple to book value.
• See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.

SHARE PRICE CATALYST

• None in the near term.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-03-30

SGX Stock Analyst Report HOLD MAINTAIN HOLD 5.80 DOWN 6.600