By Thomas Streater
Famed investor Warren Buffett once quipped that the best way to
become a millionaire is to start as a billionaire and then buy an
airline. It's a sentiment that Singapore Airlines would well
appreciate.
While Singapore Airlines ( C6L.SG) has a well-earned reputation
as one of Asia's better carriers, it has not covered itself in
glory when it comes to investments in low cost carriers in the
region. The company's first half earnings underscored the ongoing
drag from its 40% stake in Tiger Airways ( J7X.SG), with the low
cost carrier's loss of SGD129 million leading Singapore Airlines to
unveil a profit of SGD126 million, a decline of 56% from the same
time last year.
There may be more pain to come. Singapore Airline's is poised to
raise its holding in Tiger Airways to 56% after the discount
airline revealed it was rattling the tin for more capital.
Singapore Airlines will not only convert its perpetual convertible
capital securities in its troublesome investment, it will also
stump up cash to take up its entitlements in Tiger's SGD234 million
rights issue. It's an interesting use of shareholder funds given
the discount airline has delivered cumulative losses of around
SGD350 million over the past seven years.
Despite the ongoing drag from Tiger, there has been renewed
enthusiasm for Singapore Airlines shares in recent weeks. The stock
has popped around 5% since mid-October, bouncing off an eight month
low, as some investors figure the slump in oil prices will be
translated into lower fuel costs, and therefore, a boost to the
company's bottom line. Jet fuel prices are down 18% from a year
ago, but hedging contracts mean the company will not benefit fully
from cheaper fuel, which accounts for around 40% of its cost
base.
The strong U.S. dollar is another complication confronting
Singapore Airlines. The carrier has about 55% of its costs in U.S.
dollars, but only about 15% of its revenue linked to the greenback
according to Credit Suisse. Regional rival Cathay Pacific (
0293.HK), which is based in Hong Kong, is better sheltered from the
greenback's muscular performance given it has a higher proportion
of revenues generated in Hong Kong dollars -- which is pegged to
the greenback -- and Chinese yuan, which varies very little against
the U.S. currency month-to-month.
Singapore Airlines faces a tough operating environment. While
lower fuel prices could provide lift for the airline, the reality
is that Asia remains a keenly contested battleground for all
carriers at a time when passenger demand is lackluster. There is
also the longer term challenge presented by deep pocketed Middle
East airlines such as Emirates, which is seeking to establish Dubai
as a rival hub to Singapore's Changi Airport.
While Singapore Airlines confronts many challenges, one of them
isn't balance sheet strength. The stock's net cash is equivalent to
about one-third of its market cap, providing some comfort for
investors. However, that may not be enough for investors
considering exposure to an Asian airline. While Singapore Airlines
and Cathay Pacific both trade at 0.9 times book value, the former's
projected price-earnings multiple of 24 times is double that of its
Hong Kong rival, according to J.P. Morgan. The broker also expects
Cathay Pacific to generate a higher return on equity.
With numerous headwinds confronting Singapore Airlines,
investors may be better served waiting for clearer skies before
boarding this stock.
Email: thomas.streater@barrons.com
Comments? E-mail us at asiaeditors@barrons.com
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