### Browsed byTag: SIA

The Curious Case Of SIA’s Price Action After Ex-Rights (Guest post)

## I am not sure if there are any fellow investors who find the price action of SIA (Singapore Airlines) pretty weird yesterday, the first day it went ex-rights. The stock actually appreciated more than 20+%!

This post was originally posted here. The writer, Royston Tan is a veteran community member and blogger on InvestingNote, with username known as Royston_Tan.

SIA RIGHTS: THE CURIOUS CASE OF ITS PRICE ACTION

SIA went ex-rights today and there was some pretty weird action in its share price which I can’t seem to understand. I have previously written this article: SIA Rights Issue: Debunking the complication behind the Math. In that article, I tried to “simplify” the seemingly complicated SIA rights issue announcement and more importantly, look to calculate what might the trading price be for the Rights and the MCBs when they start trading on the bourse.

SIA’S VALUE WENT UP BY 26% OVERNIGHT?
SIA’s share price closed at S\$5.91 yesterday. This morning, it went ex-rights. First I believe that the “Rights” here includes both the 1) Right Shares as well as 2) the Rights MCBs.

SIA previously calculated that the Theoretical ex-rights Price (TERP) was S\$4.40/share based on the last traded price of S\$6.50 before the announcement of the intended rights issue was made. This TERP only includes the Rights Share component, based on the issuance of approx 1.78bn shares.

I shown that the calculation of the TERP price was as such:

At S\$6.50/share with 1.18bn of outstanding shares, the market cap of SIA is S\$7.67bn.

With the issuance of 1.78bn rights shares, the total number of shares will increase to 2.96bn. Total amount of capital raised = 1.78bn * S\$3.00 = S\$5.34bn.

So post rights issuance market value of SIA = (existing market cap (S\$7.67bn) + new cash raised (S\$5.34bn)) / total number of new shares (2.96bn) = S\$4.40/share.

Based on the last closing price of S\$5.91 which indicates a market cap of S\$6.97bn, the TERP should be (existing market cap(S\$6.97bn) + new cash raised (S\$5.34bn))/the total number of new shares (2.96bn) = S\$4.16/share.

This morning, SIA’s share price open at S\$4.20 which is around the calculated TERP. However, it traded up to as high as S\$5.04 and as of this writing, it is at S\$4.77.

The current price of S\$4.77 is even higher than the TERP price of S\$4.40 base on a pre-ex-rights price of S\$6.50. The current S\$4.77 price would indicate a pre-ex-rights price of S\$7.44! WoW. Overnight, SIA’s price/share has increased from S\$5.91 to S\$7.44 which is an appreciation of 26%! What is going on here?

Seriously, I am not sure what the market is thinking at this moment pertaining to SIA. In the analysis above, I have also excluded the impact of the MCBs which should indicate a much lower TERP of S\$4.16/share. Granted that these MCBs are not convertible to shares immediately. I have previously calculated that the ex-right price after all the conversions would have been in the arena of S\$3.71/share based on the last closing price of S\$5.91.

What is going to happen if the share price of SIA stays at S\$4.77 when the rights are converted to shares (on the 8 June)?

Let’s assume that an investor bought 1000 shares of SIA yesterday at S\$5.91/share. The total outlay will be S\$5,910 (excluding comms etc). For 1000 shares, he will be entitled to 1,500 right shares. He can exercise the rights, paying S\$3/rights, and convert them into actual shares.

His total outlay will be S\$10,410 (S\$5,910 + S\$4,500) and he is now the proud owner of 2,500 SIA shares. At S\$4.77/share, that will equate to a market value of S\$11,925 which is a quick profit of S\$1,515. In addition, he will still have 2,950 Rights MCB which should be worth some value when they are tradeable.

I last calculated that value to be approx S\$0.37/Rights MCB. 2,950 of them will equate to another S\$1,091 in value. Total profit could be a hefty S\$2,606 based on an outlay of S\$10,410 or a quick turnaround of 25%! Even if I am wrong in the calculation of the Rights MCB value, it cannot be negative.

Hence an investor who bought SIA shares at S\$5.91/share before the ex-right date (which is May 6) will be able to pocket at least S\$1,515/share if the share price remains at S\$4.77/share when his rights are converted to shares. Alternatively, if he is concern that the share price might decline from the current level, he can hedge and lock in the profit by shorting the counter (perhaps through CFDs or borrowed shares) until his rights are converted to actual shares.

if SIA’s share price is lower at that point, his hedges make money. If SIA’s share price is higher at that point, he can offset the losses on his hedges with his actual shares which are now worth more.

There could be other factors in play that might explain the price action of SIA such as potential redemption of short positions driving its share price up or the market all of a sudden became extremely positive over this rights issue. Bloomberg claims it could be due to hopes of easing lockdowns.

Already there are casualties in the market. The daily leverage -5x counter of SIA has been suspended as the underlying price has appreciated more than 20% from their theoretical adjusted price of S\$3.71 which means that losses are now in excess 100% for this leverage product.

SIA RIGHTS: KEY TIMELINE

6 May: Ex-rights

13 May to 21 May: Rights and MCBs are being traded on the bourse

28 May: If you still own the Rights or MCBs (as original SIA shareholders who are entitled to it or if you purchase on the open market), this will be the last day for subscription. You can pay for your rights through the ATM if your SIA shares are held under your own CDP or pay it through your custodian broker account.

8 June: Rights share will start trading (if you have subscribe to your rights by paying S\$3/rights, you will now have additional SIA shares)

9 June: If you have subscribe to your Rights MCBs at S\$1/MCB, your rights will be converted into bonds which are also traded.

CONCLUSION
This has really been an eye opener and frankly a development which i did not expect.

SIA’s market cap has just appreciated by 26% overnight!

For readers who have more insights pertaining to this “unique” situation, do feel free to share your thoughts here.

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SIA Rights Issue: Debunking The Complication Behind The Math (Guest Post)

## Most of you would probably have been aware of Singapore Airlines’ (SIA) plight and the need to do a massive fund-raising exercise, fully-backed by Temasek. This means that if Singaporeans are not willing to support our national carrier by subscribing to those new shares, Temasek will come in to backstop 100% of the issue. SIA looks to raise a total amount of S\$15bn (SIA Rights), through a combination of S\$5.3bn in Rights Shares issuance and S\$9.7bn via Rights mandatory convertible bonds or MCB for short.

This post was originally posted here. The writer, Royston Tan is a veteran community member and blogger on InvestingNote, with username known as Royston_Tan and has 17 followers.

### SIA RIGHTS ISSUE: DEBUNKING THE COMPLICATION BEHIND THE MATHS

By now, most of you would probably have been aware of Singapore Airlines’ (SIA) plight and the need to do a massive fund-raising exercise, fully-backed by Temasek. This means that if Singaporeans are not willing to support our national carrier by subscribing to those new shares, Temasek will come in to backstop 100% of the issue.

SIA looks to raise a total amount of S\$15bn (SIA Rights), through a combination of S\$5.3bn in Rights Shares issuance and S\$9.7bn via Rights mandatory convertible bonds or MCB for short.

S\$15bn looks like a HUGE amount of equity to be raised, particularly when one compares with SIA’s key competitor Qantas which, a few days prior to SIA’s announcement, highlighted that it has managed to secure ONLY A\$1.05bn in collateralized (against its fleet of 7 Boeing 787 aircraft) debt funding at an interest rate of 2.75%. Qantas share price appreciated by 26%.

Unlike SIA which has been levering up on its balance sheet to make new aircraft purchases, Qantas, on the other hand, has maintained a steady net debt balance of A\$3bn over the past 3 years. Comparatively, SIA’s net debt balance has ballooned to S\$8bn (including lease liabilities) as at end-2019 as a result of their aggressive fleet renewal plan.

So, Qantas (with a market cap of A\$5bn) requires an additional A\$1bn to tide over this major aviation crisis (for now perhaps) while SIA (now with a market cap of S\$7bn) requires a potential total of S\$15bn (plus S\$4bn in bridging loan) and one can see the huge disparity in terms of capital management.

With that notion in place, let’s evaluate the two Rights issuance, first the SIA Rights Share followed by the SIA Rights Mandatory Convertible Bonds.

I will then follow up with 4 scenario analysis for a potential SIA shareholder and calculate what might the market value of the SIA Rights Shares and SIA Rights MCBs be worth when they start trading.

They are;

Singapore Airlines Ltd (SGX: C6L) Is In Deep Trouble And Rights Issue Call Is Imminent (Guest Post)

## The Covid-19 situation has hit the aviation industry really hard and in particular the airlines, SIA, since they are highly capitalized business which needs constant cashflow to fund their operating costs, capex and fixed costs. In the scenario where they have to cut capacity like where we are in this situation now, the company may be able to “save” on their operating costs since they do not have to incur charges like handling and ground charges that are related to the operating business.

#### Singapore Airlines Ltd (SGX: C6L) Is In Deep Shit And Rights Issue Call Is Imminent

The Covid-19 situation has hit the aviation industry really hard and in particular the airlines since they are highly capitalized business which needs constant cashflow to fund their operating costs, capex and fixed costs.

In the scenario where they have to cut capacity like where we are in this situation now, the company may be able to “save” on their operating costs since they do not have to incur charges like handling and ground charges that are related to the operating business.

But, they do have to continue paying for parking charges to the airport, levies as well as fixed costs such as salaries and rental that will continue to bleed the business.

Cashflow Simulation Run
I’ve run a simulation run where the left hand side shows their latest Q3 results for the year ending 31 Dec 2019, while the middle portion reflects what the situation is today. On the right side, I’ve accounted for movement that is related to cashflow, so things like depreciation is taken out of context because they are non-cashflow related items.

The middle portion reflects the current scenario we have today.

For example, the topline sees a 95% capacity cut which was announced just a few days ago since Singapore is on semi-lockdown situation. Consequently, I’ve adjusted the same for operating costs related such as fuel, inflight meals and handling charges.

For staff costs, I’ve used a 20% haircut across the payroll while for other fixed costs I’ve taken a 50% haircut.

The resulting loss coming in from this simulation is a negative \$(1,998m) for the quarter. If we divide this by months, it means incurring a net loss of \$(666m) / month.

What this means from a cashflow point of view is that should the situation prevails, the company is burning approximately \$1,461m in cash every quarter, or \$487m every month.

Now, this might look okay if you are in a good standing order in terms of your balance sheet but let’s see what they have today.

Can SIA Fly Again?

## Can SIA Fly Again?

Company Background:
Singapore Airlines Limited is engaged in passenger and cargo air transportation, engineering services, training of pilots, air charters and tour wholesaling and related activities. The Company has four segments that contribute to its operating revenue:
1. Airline operations
2. Engineering services
3. Cargo operations
4. Others

The SIA Group has more than 20 subsidiaries with all the experts, which include(but not limited to):
1. SilkAir (a wholly owned subsidiary)
2. Scoot (a wholly owned subsidiary)
3. TigerAir (a wholly owned subsidiary)
4. Singapore Airlines Cargo

One strength of SIA group is their well diversified and targeted business. After the group took 56% ownership stake of Tiger Airways and become its parent company in October 2014, SIA accomplished their strategic portfolio. Subsidiaries include Silkair, Scoot air and Tigerair, all contribute to the revenue of SIA group. The well structured business model also plays an important role in passengers yield battle amid SIA group and their competitors.

Recent Events & News:
Singapore Airlines, financial result 2015/2016, find the full report here.

March 20, ‘SIA Cargo may make provision in current financial year due to fine’, refer to the news here.

March 17, ‘SIA, 10 other airlines hit with S\$1.2 billion fine by EU regulators for taking part in cargo cartel’, see the content here.

March 15, ‘SIA’s load factor up 3.2 percentage points in February’, check the detail of performance here.

Performance Summary:
SIA group, the flag carrier based in Singapore, maintain their steady operating performance since 2012. In 2016, their net profit doubled, which is not really a result of better operation, but mainly because of decreasing fuel price and less loss in the activities from hedging on fuel. SIA preserves a stable balance sheet. The group gained high dividend on long-term investment, thus spent additional money in investing, plus less proceeds from different disposals and share insurance, SIA held lower amount of free cash in 2016. When compared to competitors, SIA keep the most stable performance. Under the circumstance that Cathay Pacific met loss this year, SIA managed to beat Cathay by profit margin, but threat from budget airline companies are still serious.

Financial Highlights:
1. Operating performance:

a) FY2016 performance:
Compared to the performance in 2015, SIA observed 2.1% drop in their revenue in 2016. Revenue was decreased in all four business segments. For flight carrier like SIA, the fuel cost will occupied large portion of the total operating expenditure. Thus, the \$1052.7 reduction of fuel cost in 2016 was the main reason of 4% expenditure decline in the income statement.

News about the effect of lower fuel price on SIA’s net profit in the financial year of 2016: ‘SIA profits soar on lower fuel prices, one-off gains’, refer to the news here.

Meanwhile, profit of SIA doubled with the quantity of \$851.8m in 2016, compared to the number of \$406.7m in the last year. SIA has achieved outstanding result in profit in 2016. To find out the reason behind the sharp rise, formula of net profit is provided here:

Net profit = Operating profit + Other Profit – Other Expenditures

Thus, in the case of SIA, the growth of profit was a consolidate contribution from:
1. Lower fuel expenditures due to oil price decline
2. Higher operating profit of \$604m, which arose from less ”Fuel hedging loss recognised in ‘Fuel costs’”
3. Higher other profit such as Dividends from long-term investments
4. Lower other expenditures such as Impairment of aircraft

However, it turned out that the significant progress in net profit is not really a result of improved operation.

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