Just as the lower global interest rates in 2019 saw a convergence in global REIT performances, in the 2020 YTD, global aviation, aerospace and airline services stocks have declined in tandem on the economic impacts of COVID-19.
In the 2020 year to 3 April, Singapore Airlines, SIA Engineering, SATS and ST Engineering averaged declines of 38% bringing their average 10-year total returns to a marginal gain of 7%. This was in-line with the median performances of the 280 global aviation, aerospace and airport services stocks.
From an industry perspective, Singapore Airlines, SIA Engineering, SATS and ST Engineering maintain highly competitive Financials and Valuations. Together these Singapore stocks maintain higher ROE and trailing yields, and lower debt-to-equity, debt-to-assets, and volatility than the global industry median.
On 26 March, Singapore Airlines announced an issuance of S$5.3 billion in new equity and up to S$9.7 billion in mandatory convertible bonds. The rights issue, backed by Temasek Holdings, will be used to fund Singapore Airlines capital and operational expenditure requirements.
Together, Singapore Airlines (SIA), SATS, SIA Engineering (SIAEC) and ST Engineering maintain S$21 billion in market capitalisation, while trading an average daily turnover of S$66.6 million a day in 1Q20. This means the four stocks with significant aviation, aerospace or airport services revenue represent 2.9% of Singapore’s total market capitalisation and 4.3% of its daily turnover. While SIA, SATS and SIAEC are well known industry plays, ST Engineering reported (click here for more) as much as 43.9% of its FY19 (ended 31 Dec) revenue to the aerospace segment.
Global Aviation, Aerospace and Airport Services
By comparison, the 280 global stocks that reported at least 40.0% of their last FY revenue to aviation, aerospace and airport services maintain a total market capitalisation close to S$1.0 trillion and include some of the world’s biggest stocks such as Boeing Co, Airbus Se and Airports of Thailand PCL.
The economic challenges that COVID-19 has brought to the industry saw increased correlation in the performances of these 280 stocks over the first three months of 2020. So much so that the average decline of SIA, SATS, SIAEC and ST Engineering in the 2020 year through to 3 April, was within 2.0% of the median decline of the 280 stocks.
This also means that the average 10-year total returns for the small fleet of Singapore aviation, aerospace and airport services stocks was not significantly different to the global industry median, as illustrated below.
The convergence in performances is also exemplified with a 19% standard deviation of 2020 returns through to 3 April for the top 10% global aviation, aerospace and airport services stocks by market value. This compares to 26% for the equivalent percentile of global technology stocks and 27% for equivalent percentile of global cyclical consumer stocks.
SIA, SATS, SIAEC and ST Engineering averaged 26% declines in total return in March, contributing the most to their 2020 year to 3 April declines, during which retail investors were net buyers of the group of stocks, and institutional investors net sellers of the group of stocks with the exception of SATS.
On 31 March, the International Air Transport Association (“IATA”) published an updated analysis showing that airlines may burn through $61 billion of their cash reserves during 2QCY20, while posting a quarterly net loss of $39 billion (click here for more). The estimate was based on the modelling of severe travel restrictions lasting for three months.
Earlier this year, IATA announced full-year global passenger traffic results grew slower but steadily in 2019, up 4.2% compared to 7.3% in 2018. In the US, recent Transportation Security Administration (“TSA”) data has shown that 154,000 travellers passed TSA checkpoints on March 30 down from more than 2.3 million a year earlier.
For a recent presentation by KGI Securities Singapore on the impact of COVID-19 on the aviation sector, click here.
Competitive Foundations Flying Into 2020
From an industry perspective, SIA, SIAEC, SATS and ST Engineering do maintain highly competitive Financials and Valuations. Together these Singapore stocks maintained higher ROE and trailing yields, and lower debt-to-equity, debt-to-assets, and volatility than the global industry median.
As illustrated above, a number of fundamental factors had positioned SIA, SIAEC, SATS and ST Engineering has highly competitive relative to their global peers going into 2020.
The current average Price-to-Earnings (P/E) ratio for SIA, SIAEC, SATS and ST Engineering is 12.0x, with the average Price-to-Book (P/B) ratio at 1.9x, which are discounts of more than a third to the respective 5-year averages. By comparison, the global industry has seen its current P/E and P/B ratios fall by more than a third, with the global median P/E currently at 10.3x and the global median P/B ratio currently at 1.0x.
As maintained by SIA, the aviation sector is a key pillar of Singapore’s economy, supporting more than 12% of the country’s GDP and 375,000 jobs. COVID-19 has had similar impacts across the global aviation, aerospace and airport services stocks. There have been multiple examples of proactive management and cost-efficiency initiatives, for instance SIAEC announced on 2 April that it was stepping up measures to mitigate the impact of COVID-19 (click here for more). On 3 April, Channel News Asia also reported SIA will provide at least 300 care ambassadors to help fill a manpower gap at hospitals, in light of the rising number of COVID-19 cases in the country.
Temasek’s Strong Vote of Confidence with the SIA Rights Issue
On 26 March, SIA announced an issuance of S$5.3 billion in new equity and up to S$9.7 billion in mandatory convertible bonds (“MCBs”). While having a dilutive impact, the renounceable rights issue, backed by Temasek Holdings will be used to fund SIA’s capital and operational expenditure requirements. Three days prior to announcing the rights issuance, SIA announced it will be cutting 96% of the capacity that had been originally scheduled up to end-April, given the further tightening of border controls around the world over the last week to stem the COVID-19 outbreak.
The new equity proposed is 1,777,692,487 rights shares at an issue price of S$3.00 for each right shares with three rights shares for every two existing ordinary shares. The S$3.00 issue price of the rights shares represents a discount of approximately 53.8% to the preceding transacted price of the shares on 25 March 2020 at S$6.50 prior to the announcement. The S$3.00 issue price is also a discount of approximately 31.8 % to the theoretical ex-rights price of S$4.40 per share.
The S$9.7 billion in Rights MCBs consist of a S$3.5 billion issuance with a potential further issuance of S$6.2 billion. The first S$3.5 billion will be issued in the denomination of S$1.00 for each Rights MCB, on the basis of 295 Rights MCBs for every 100 existing ordinary shares.
The Rights MCB maturity date will be the 10th anniversary of the date of issue of the Rights MCB. In the case of the conversion of Rights MCBs on the Maturity Date, each S$1,000 in principal amount of Rights MCBs will accrete to S$1,806.11. The price at which the SIA shares shall be issued upon Mandatory Conversion will initially be S$4.84 per Share, but shall be subject to adjustment in certain events. Alternatively, in the case of a redemption of Rights MCBs on a Semi Annual Date by SIA, the accreted principal amount will be an amount equivalent to each S$1,000 in principal amount of Rights MCBs, multiplied by the relevant redemption price.
SIA has also arranged a S$4 billion bridge loan facility with DBS Bank, supporting the company’s near-term liquidity requirements.
Full details of both fund raisings, that will be offered on a pro-rata basis via a rights issue can be found here. Both rights issuances are subject to shareholder approval at an extraordinary general meeting that will be held in due course.
Like Changi Airport, Singapore Airlines has been recipient of a number accolades, and is the world’s most awarded airline.