Singapore Airlines (SIA) - OCBC Investment 2021-05-21: Tapping On Additional Mandatory Convertible Bonds


Singapore Airlines (SIA) - Tapping On Additional Mandatory Convertible Bonds

  • Strong cargo demand from e-commerce, pharmaceuticals and electronics.
  • Cash burn rate reduced to S$100-150m/month.
  • Issuance of additional S$6.2b of MCBs.

SIA's FY21 net loss was wider than expected

  • Singapore Airlines (SIA, SGX:C6L)’s FY21 revenue fell 76.1% y-o-y to S$3.8b, dragged by weak passenger revenue (- 94.7% y-o-y), but partially offset by higher cargo revenue (+38.8% y-o-y). PATMI loss widened to S$4.3b as compared to a loss of S$212m in FY20 as the full impact of COVID-19 was only felt from 4QFY20.
  • On a h-o-h basis, PATMI loss narrowed by S$2.7b h-o-h, thanks to lower fuel hedging ineffectiveness, fair value gains on fuel derivatives due to higher Brent oil prices, and a gradual recovery in flown revenue.
  • No dividend was declared by SIA for FY21 as compared to 8 S-cents in FY20 to conserve cash amid a challenging operating environment.

SIA plans to reinstate 32% of pre-COVID-19 levels by Jul 2021

  • Passenger traffic shrank 97.9% y-o-y for all three airlines as international borders remain largely closed. As of Apr 2021, SIA resumed 24% of pre-COVID-19 capacity and aims to reinstate 32% and 49% of pre-COVID-19 capacity and city links respectively by Jul 2021.
  • SIA’s monthly cash burn has reduced from S$350m last year to ~S$100-150m, backed by strong cargo demand and increase in passenger capacity. Management expects the cash burn rate to remain around the current level if demand conditions stay similar. The Singapore government announced further tightening social distancing measures and border controls amid rising infection rates in the community and resurgence of COVID-19 in several countries. This is likely to weigh on SIA’s recovery trajectory, especially in 1QFY22, given its sole alliance on international travellers.

To issue S$6.2b of MCBs on the basis of 209 Rights MCB for every 100 existing SIA shares

  • As the recovery trajectory remains uncertain amid a prolonged COVID-19, SIA announced the issuance of the second tranche of Mandatory Convertible Bonds to raise ~S$6.2b to further strengthen its liquidity position.
  • Recall that SIA raised a total of S$15.4b of liquidity since Apr 2020 and has S$2.1b of untapped committed lines of credit. The renounceable mandatory convertible bonds (Rights 2021 MCBs) will be offered on the basis of 209 Rights MCB for every 100 existing SIA shares at an issue price of S$1.00/Rights MCB, with an initial conversion price of S$4.84/share and zero coupon.
  • Similar to the first tranche of MCBs issued last year, Rights 2021 MCBs may be redeemable at the option of SIA in whole or in part every six-months of the issue date before the maturity date at 8 Jun 2030. Implied yield depends on the timing of the redemption i.e. first 4 years at 4% per annum, subsequent 3 years is 5% per annum and the subsequent 2 years is 6% per annum, compounded on a semi-annual basis. If MCBs are not redeemed earlier by SIA, investors will get S$169.797 on maturity date for every S$100 in principal amount of Rights 2021 MCBs.

Valuation looks rich

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2021-05-21
SGX Stock Analyst Report HOLD DOWNGRADE BUY 4.75 DOWN 4.800