SIA FY Results: What caused SIA to loss $732m in the 4th quarter?

SIA FY 2019/2020 

SIA reported its first Full Year loss of $212 million. This was mainly due to a loss of $732 million incurred in the 4th quarter (Jan to Mar 20). As expected, there is no dividends declared this time.

SIA Net Asset Value (NAV) is now at $7.86, dropping by more than $3 compared to a year ago. This value will change after the rights issue.

This means that SIA is currently trading at a Price/NAV ratio of less than 0.50! SIA is in a unique position. While other airlines caters to both domestic and international travels, SIA caters to only international travels. When the number of COVID19 cases decrease in other countries, airlines typically are allowed to start operating their domestic flights which helps them to generate some form of revenue. SIA has to depend on our government negotiation with other countries to start international flights between the countries. Hence, its recovery will be slightly slower. 

Lets take a look at what caused such a big loss in the 4th quarter:

From: SIA Press Release

SIA made a loss in the 4th quarter mainly because of (i) fuel hedging loss of $198 million and (ii) fuel hedging ineffectiveness of $710 million. 

Fuel hedging loss occurred because fuel prices plunged in the first quarter. The demand for oil dropped when countries embarked on a lockdown to flatten the COVID19 curve. This was coupled with an oversupply of oil with price wars happening resulting in oil futures contract becoming negative in an unprecedented event. 

Fuel Hedging ineffectiveness happened because SIA over hedged. This was due to the capacity cuts made resulting in a lesser fuel consumption.

While SIA had shared that they expect more fuel hedge in future quarters, they have not share whether they expect fuel hedging ineffectiveness. There were no details on the average duration of the contracts so it is hard to guage.

What about staff cost? 

From: SIA Consolidated P&L

SIA managed to reduce staff cost by more than 60% this quarter to post just $273.6 million. They shared that it was due to the various support schemes given by the government. It is noted that in March, they have also undertaken wage cuts for its management team and compulsory no-pay leave for employees. I hope that they will look after their staff especially those on NPL even during such crisis.

There are other cost that would be incurred during this period like aircraft maintenance, landing, parking, handling costs. But my biggest concern is on fuel hedging ineffectiveness. SIA could have provided some details on this so that investors can make an informed decision especially those who are wondering whether to exercise the rights issue.

What should you consider and steps to take for SIA Rights Issue

SIA did a Rights Issue of Rights Shares and Rights MCBs. I am not vested but because so many friend are asking, I thought I should share on these.

RIGHTS SHARES

Based on the Record Date (5 May, 5pm), for every 2 SIA shares, you will get 3 rights shares. If you have 1,000 SIA shares, you will be alloted 1,500 rights shares. You can check your online CDP account if you are unsure. 

These rights shares are re-nounceable. This means that they can be traded from now till 21 May 2020, 5pm. The symbol for the rights share is “LRDR”, under the name "SIA R". 

As the issue price of the one rights share is $3, the price of the rights share is affected by the price of SIA shares. Due to market efficiency, the formulae for price of rights issue is: 

Price of rights issue = price of SIA share - $3

For example: if SIA share is trading now at $3.80, the rights shares will trade at around $0.8 and below. 

If SIA shares trade below $3 during this period, the rights shares will trade at $0.001 because it is cheaper to buy SIA shares directly instead of the rights.

If you have the rights shares, you can do one of the following:

a) Sell your rights shares (before 21 May, 5pm)

b) Exercise and payment for your rights 

You need to pay $3  per right share. Payment can be made online at SIA website (before 28 May, 5pm) or at ATMs (before 28 May, 9.30pm)

On 8 Jun, you can trade them as SIA shares via symbol "C6L". 

c) Buy more rights shares and then proceed with (b) 
Another method: If you want more SIA shares, more than what you are allotted with, you can make payment for excess shares. The excess is subjected to allocation, with priority given to rounding up to hundreds. 

d) Do nothing

If you are planning to do step d) as you are disappointed with SIA, do consider doing step a).

RIGHTS MANDATORY CONVERTIBLE BONDS (MCBs)

Based on the Record Date (5 May, 5pm), for every 100 SIA shares you will receive 295 rights MCBs. If you have 1,000 SIA shares, you will be alloted 2,950 rights MCBs. You can check your online CDP account if you are unsure. 

These rights shares are re-nounceable. This means that they can be traded from now till 21 May 2020, 5pm. The symbol for the rights share is “GANR”, under the name "SIA MCB R". The issue price of the rights MCB is $1 per share.

This is a zero-coupon conversion bond which means that there will be no interest payments. At maturity, after 10 years, the maturity amount for 1,000 units of MCBs is $1,806.11. As this is a conversion bond, the maturity amount will be converted to SIA shares at conversion price of $4.84 per share (subjected to adjustments such as consolidation or subdivision of Shares, capitalisation of profits or reserves, capital distributions, dividends, share repurchases and others). 

If there are no adjustments, in 10 years:

1,000 units of MCBs = $1,806.11 = 373.16 SIA shares 

1st two columns from SIA Announcement 

SIA can recall the MCBs early at a predetermined yield of between 4% to 6%. 

Due to the nature and issue price of MCB , it is currently trading at $0.001. 

If you have the rights MCBs, you can do one of the following:

a) Sell your rights MCBs(before 21 May, 5pm)
If you can still make a profit after deducting commission.
For example if you have 20,000 SIA shares, you will get 59,000 rights MCBs. If you sell the rights at $0.001, you will get $59, excluding commission.

b) Exercise and payment for your MCBs 

You need to pay $1 per right MCB. Payment can be made online at SIA website (before 28 May, 5pm) or at ATMs (before 28 May, 9.30pm). On 9 Jun, you can trade the MCBs.

c) Buy more rights MCBs and then proceed with (b)
Another method: If you want more SIA shares, more than what you are allotted with, you can make payment for excess shares. The excess is subjected to allocation, with priority given to rounding up to hundreds. 

d) Do nothing

Please do your own due diligence on the steps to embark on after reading this. 

SIA has published a full advertorial on the rights issue on The Straits Times.

From The Straits Times (page A5, 15 May 2020)

My Investment Portfolio (End Apr 2020)

Transactions made in Apr 2020:

- Bought 1,000 units of DBS at $19.55

- Bought 1,000 units of OCBC at $8.63

I continued to buy stocks in the banking sector in the month of April as shared in my earlier posts in Apr and Mar. Do note that this is not a buy call. Please DYODD. I am going in with a long time horizon of at least 2 years and with expectations that these banks will cut dividends or not give out dividends in the near future as they maintain high capital levels.

DBS has just announced their Q1 2020 result and maintained their dividends for this quarter at 33 cents. It is important to note that this result, similarly for UOB and OCBC upcoming Q1 2020 financial result, will not and does not capture the full impact of the Fed rate cuts. The full impact of the rate cuts will be felt in the Net Interest Margin (NIM) in the Q2 2020 result. There will also be more non-performing loans (NPL) and allowances for loan losses. 

In case you are wondering, DBS's Q1 net book value is  $19.86. The share price is above the book value due to the upcoming 66 cents payment which will XD on 12 May. 

I am still looking into the possibility of buying more bank stocks if it drops lower. Also, looking into the other stocks such as CDG, ST Eng and reits.

2020 Dividends received in Teal colour

Year to date, the amount of dividends received is only at $616.06, which is the lowest I have received so far since 2015. Dividends were impacted as some companies cut dividends to conserve more cash and some postponed their AGMs due to Covid19. For the former, if these are reits, they retain part of the dividends to retain more capital and will only pay them out at a later stage. For the latter, once the AGMs are held and resolutions are passed, the dividends will be paid out. 

Bearing unforeseen circumstances, I am expecting to receive* my highest amount of dividends, of at least $2,000 for the month of May. Fingers crossed! 

At this point in time, I am not too worried, as I am already expecting this year's dividends to be lower than last year. If you are an investor, I believe you will have the same thinking and are prepared for it. My dividends could be less than $6,500 this year. 

Dividends received* in Apr 20: $66.14 (Mapletree Commercial Trust, Suntec Reit)

Total dividends received in 2020: $616.06

Average dividends per month: $51.34

Total Portfolio Market Value: $199,584

Notes:

*Dividends are recognised after ex-dividend (xd) date.

Average dividends per month is calculated by dividing the dividends received by 12 months regardless of the month.

Portfolio excludes Singapore Savings Bonds.