SIA soared but SATS remained grounded – Which to buy?

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Singapore Airlines (SIA) (SGX:C6L) has recovered most of its share price loss in the last 5 years while Sats (SGX:S58) is down 40%. Looking at a total return perspective, SIA has distributed $0.76, recording a slight positive total return while Sats has only distributed $0.25 in the last 5 years.

This is probably because SIA has been profitable for the last 1.5 years while SATS has just filed a notice to SGX, informing the exchange that it has recorded pre-tax losses for the last three latest consecutive financial years.

Fortunately for Sats, as a big company, it was able to stay well above the average daily market cap requirement of at least $40 million and stayed out of the SGX watchlist. Otherwise it would have to delist should it not be able to turn a profit or maintain the required market cap.

Aviation industry

Many investors look at SIA & Sats in the same lens. Both are focused on the aviation industry and both are interdependent to each other as any success by either company will benefit both and strengthen hub competitiveness.

Sats has created dedicated teams for SIA with digital ground handling systems that are integrated with Singapore Changi Airport, ensuring seamless service for passengers from ground to air. Key touchpoints during the customer journey are analysed by both companies, using data analytics to find opportunities to improve service and personalisation such as in F&B offerings.

In fact, Sats was viewed as the more resilient option as 26.8% of its revenue came from the non-aviation sector such as its ground security services and the provision of meals to other industries.

Although SIA flies out of Singapore, Sats was also perceived as more Singapore focused with 80% of its revenue generated in Singapore.

SIA capacity is expected to reach an average of around 92% of pre-pandemic levels in December 2023. SIA expects to return to pre-Covid capacity levels by March 2025 with a progressive ramp-up of services across the network. Cargo yields have remained resilient, being 37.0% above pre-pandemic levels.

For Sats, flights handled and in-flight meals served returned to 82% and 83% of pre-Covid levels, respectively.

How did SIA turn a profit

SIA is more efficient with record load factors supporting its highest ever half-year operating and net profits. SIA and Scoot carried 17.4 million passengers in the first six months of FY2023/24, an increase of 52.3% year-on-year. Passenger traffic grew 38.0% from a year before, outpacing the capacity expansion of 29.0%.

As a result, SIA’s passenger load factor (PLF) improved by 5.8% to 88.8%, the highest ever half yearly PLF. SIA and Scoot achieved record PLFs of 88.0% and 91.3% respectively. 

The demand for air freight remained soft due to inventory overhang, as well as geopolitical and macroeconomic headwinds. The cargo load factor fell 8.4% to 52.7% year-on-year as cargo loads dipped 6.0%, while capacity grew 8.9% mainly due to increased passenger aircraft bellyhold space. Nevertheless, cargo yields remained above pre-pandemic levels.

Why is Sats not able to turn a profit?

Sats is being held down by one-off costs related to the integration of Worldwide Flight Services (WFS). Interest expense was also much higher than expected due to the current interest environment.

The acquisition of WFS was supposed to be immediately financially accretive, raising earnings per share by 78% from 1.8 cents as reported in FY2022 to 3.2 cents on a pro forma basis, and increasing FY2022 pro forma revenue by more than 200%.

There was also supposed to be potential run-rate synergies in excess of S$100 million which amounts to nearly 6 cents per share.

In comparison, Sats made a profit of 22.2 cents in 2018 and 15.0 cents in 2019.

It is worth noting that Sats has narrowed its net loss very significantly and could possibly turn a profit in the next half year. This will be in part due to WFS’s contribution as WFS itself was also loss making for 1Q24 while it turned a narrow profit in 2Q24.

Debt load – Sats

Sats was a preferred choice for many investors before the pandemic and before the acquisition of WFS due to its net cash position. Sats had a history of making small bolt-on acquisitions and maintained a strong net cash position as well as stable dividends. Sats had a pre-pandemic debt balance of $0.3 billion and a cash position of $0.5 billion.

Debt balance now stands at $2.8 billion, putting the debt to equity ratio at 1.10 times.

Cash balances now stands at $0.5 billion, which means that Sats is in a net debt position of $2.3 billion and a net debt to equity ratio of 0.90 times.

Debt load – SIA

SIA on the other hand loaded up on debt and said that it wanted to come out stronger after the pandemic. Many viewed SIA’s moves to be excessive but it seems to be paying off now. SIA balanced its debt raising with some flexibility by issuing Mandatory Convertible Bonds which it redeemed.

Total debt balances stands at $14.7 billion, putting the debt to equity ratio at 0.85 times.

Cash balances stands at $13.5 billion, which means that SIA is in a net debt position of only $1.2 billion and a net debt to equity ratio of only 0.07 times. If SIA carried on its current profit trajectory, it would likely be in a net cash position in less than a year. SIA now believes that its balance sheet is among the strongest in the industry.

Upcoming challenges

Growing competition, macroeconomic uncertainties, and inflationary cost pressures pose challenges to the airline industry going forward. For SIA, their opportunity lies in the reopening of China as it has just resumed flights to more cities in China. Sats also has a sizeable presence in China which would benefit from this reopening.

Which company to buy?

Looking at the one year performance for both stocks, Sats is also the underperformer when compared to SIA. Although both are in the aviation industry, both companies operate in different segments and have very different cost bases. SIA benefits more from an operating leverage but will also be hit more when the tide recedes.

In this instance, we do not want to be a contrarian. We like SIA better as SIA is currently doing well. It went into the pandemic with its belt tightened and came out of the pandemic with the right footing and right mindset and is now capturing market share.

SIA also has another potential avenue for profits, SIA has a 25.1% stake in the merger of Air India and Vistara which is slated to be completed by March 2024, subject to regulatory approvals.

We consider Sats as the contrarian alternative. Investors must anticipate the success of the WFS acquisition and its seamless integration, expecting it to yield synergies for the entire Sats group and for Sats to turn a sizeable profit, enabling it to alleviate itself of its debt burden amidst a challenging and uncertain economy.

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