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COMPANY
ANALYSIS
Sophia
Hägerich
S0545879
Prof.
Dr.
Ralf
Hafner
Corporate
Finance
WS
14/15
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Table of Content
Introduction
Chapter 1 Corporate Governance and Shareholder Analysis
1.1. Management and Ownership
1.2. Possible Conflicts of Interest
1.3. Interaction with the Market
1.4. Social Responsibility and Image Creation
1.5. Breakdown of Shareholders
Chapter 2 Measures of Corporate Performance
2.1. Financial Statements and related Measures
2.2. Book Rates of Return
2.3. Financial Ratios
Chapter 3 Risk Profile
Chapter 4 Performance Profile
Chapter
5
Cost
of
Equity,
Cost
of
Debt
and
Cost
of
Capital
5.1.
Cost
of
Equity
5.2.
Cost
of
Debt
5.3.
Cost
of
Capital
Chapter 6 Projects of the Company
6.1. Typical Projects
6.2. Performance of current Projects
6.3. Future Projects
Chapter 7 Financing Profile
Chapter 8 Optimal Debt Ratio
Sources
2
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Introduction
–
General
information
Singapore
Airlines
Limited
(SIA)
is
a
publicly
traded
limited
liability
company,
which
is
located
and
incorporated
in
the
Republic
of
Singapore.
As
a
subsidiary
of
the
investment
company
Temasek
Holdings(Private)
Limited,
it
is
owned
by
the
government
of
Singapore
and
it
is
traded
on
the
Singapore
Exchange
(SGX).
Its
main
business
activities
are
diversified
in
passenger
and
cargo
air
transportation,
engineering
services,
training
of
pilots,
air
charters
and
tour
wholesaling
and
related
activities.
The
company
operates
from
its
hub
Changi
International
Airport
with
its
routes
covering
Asia,
Europe,
the
Americas,
South
West
Pacific,
and
Africa.
It
is
a
member
of
the
Star
Alliance
Network
and
currently
serves
33
countries
with
an
annual
passenger
number
of
18.3
million
passengers.
Also,
it
is
known
for
its
high
standards
and
dedication
to
customer
services
that
have
resulted
in
various
industry
and
travel
awards,
making
it
one
of
the
most
rewarded
airlines
globally.
Chapter
1
Corporate
Governance
and
Shareholders
Analysis
1.1.
Management
and
Ownership
Singapore
Airlines
is
a
stock
corporation
owned
by
its
shareholders.
It
was
founded
in
1972
when
the
company,
as
it
is
known
today,
during
the
separation
process
from
Malaysian
Airlines,
took
over
all
the
corporate
headquarters
in
Singapore.
Its
class
of
shares
consists
out
of
ordinary
shares
and
one
special
share
held
by
the
Minister
of
Finance.
The
company
has
issued
1,199,851,019
shares
including
2.09%
treasury
shares.
The
holders
of
ordinary
shares
(except
treasury
shares)
are
entitled
to
receive
dividends
when
declared
by
the
company
and
have
one
vote
per
share.
In
the
annual
report
(14.
Share
Capital)
the
reason
for
the
one
non-‐
tradable
Special
Share
issued
to
the
Ministry
of
Finance
is
stated:
the
company’s
dependency
on
Air
Service
Agreements
(ASAs)
between
governments.
These
require
fulltime
effective
control
and
substantial
company
ownership
by
the
Singapore
nationals,
as
they
have
the
tenure
of
the
respective
ASAs.
The
special
share
has
the
same
rights
as
the
ordinary
shares
and
in
addition,
according
to
Article
3A
of
the
Articles
of
Association,
no
resolution
can
be
passed
on
without
prior
written
approval
of
the
Singapore
Finance
Department.
Again,
governmental
control
over
the
company,
not
only
as
main
shareholder
of
ordinary
shares,
but
also
through
the
Special
Share
is
demonstrated.
The
corporation
compromises
a
Board
of
Directors
of
9
members.
During
the
fiscal
year
2014
ending
on
March
31
no
significant
changes
were
in
the
objectives,
policies
or
processes
relating
to
the
management
of
the
company’s
capital
structure
were
made.
The
Chairman
Stephen
Lee
Ching
Yen
was
appointed
on
1
January
2006.
As
in
his
past
career
he
was
nominated
member
of
the
parliament
and
is
currently
a
member
of
the
Advisory
Panel
of
Temasek
Holdings
(Private)
Limited
and
an
alternate
member
of
the
council
of
presidential
advisers,
the
state
secures
institutional
control
in
the
company.
The
Board’s
principal
functions
are
deciding
the
Group’s
strategic
direction,
reviewing
and
3
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
approving
annual
budgets,
financial
plans
and
monitoring
the
Group’s
performance;
approving
major
acquisitions
and
fund-‐raising
exercises;
and
ensuring
the
Group’s
compliance
with
all
laws
and
regulations.
It
holds
four
meetings
during
the
company’s
financial
year
to
fulfill
its
obligations.
Chief
Executive
Officer
is
Goh
Choon
Phong.
The
other
members
of
the
board
are
displayed
in
the
table
below.
(source:
annual
report
13/14
p.47)
All
directors
come
from
different
backgrounds
and
display
diverse
expertise
in
finance,
legal,
industry,
business,
and
marketing
and
management
fields.
The
Chairman
leads
the
Board
and
is
responsible
for
its
workings
and
proceedings.
He
is
responsible
to
communicate
with
shareholders
at
the
company’s
annual
and
extraordinary
general
meetings.
The
CEO
heads
the
Management
Committee
and
oversees
the
execution
of
the
Company’s
corporate
and
business
strategies
and
policies,
and
the
conduct
of
its
business.
Five
Board
Committees
have
been
formed
to
assist
the
Board
in
the
execution
of
its
responsibilities:
•
Board
Executive
Committee
•
Board
Audit
Committee
•
Board
Compensation
and
Industrial
Relations
Committee
•
Board
Nominating
Committee
•
Board
Safety
and
Risk
Committee
The
Board
holds
separate
Strategy
Sessions
to
assist
Management
in
developing
its
plans
and
strategies
for
the
future.
The
non-‐executive
Directors
also
meet
without
the
presence
of
management
to
review
how
it
is
meeting
SIA’s
goals
and
objectives.
4
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
All
in
all,
Singapore
Airlines
intends
to
ensure
great
objectivity
of
management
and
an
alignment
with
shareholder
interest.
For
the
fiscal
year
2014,
the
Nominating
committee
had
engaged
an
independent
global
executive
search
firm,
not
affiliated
to
the
company
or
any
of
its
directors,
to
assist
in
conducting
a
formal
evaluation
of
the
SIA
Board
and
its
Board
Committees.
The
process
involved
questionnaires,
which
provided
opportunities
for
feedback
from
the
directors.
The
evaluation
confirmed
that
the
SIA
Board
and
its
Board
Committees
were
generally
functioning
effectively
and
performing
well.
One
interesting
common
feature
is
that
all
of
the
board
members
are
relatively
old
with
an
average
age
of
62
years.
This
could
lead
to
the
assumption
that
Singapore
Airlines
Ltd.
is
governed
by
a
more
conservative
leadership
with
experienced
knowledge
of
the
challenges
and
opportunities
facing
their
businesses.
Although
the
balance
of
power
seems
to
tilt
in
favor
of
shareholders,
it
is
interesting
to
see
that
all
board
members
are
appointed
chairman
or
director
in
other
companies
or
organization.
This
could
indicate
less
oversight
of
the
companies
business
due
to
the
lack
of
time
and
in
addition
a
possible
conflict
of
interest.
1.2. Possible Conflicts of Interest
Conflict between management and shareholders:
As
the
company
states
in
its
annual
report,
the
fact
that
seven
out
of
nine
members
of
the
board,
which
form
the
nominating
board,
are
independent
from
Management
and
the
corporation’s
main
shareholder,
the
board
is
considered
strongly
independent.
To
avoid
a
conflict
of
interest
between
shareholders
and
management,
Singapore
Airlines
intends
to
ensure
a
balanced
level
of
power
and
authority
within
the
company’s
structure.
Therefore
the
chairman,
Mr.
Stephen
Lee,
and
the
CEO,
Mr.
Goh
Choon
Phong,
are
not
related
to
each
other
and
an
appropriate
division
of
responsibilities
between
the
Chairman
and
the
CEO
exists.
Also
the
company’s
three
key
performance
indicators
(KPIs)
are
combining
shareholder
and
management
interest:
•
SIA
Group’s
Return
on
Shareholders’
Funds
•
SIA
Company’s
Operating
Profit
Margin
•
SIA
Company’s
Passenger
Load
Factor
Defined
in
the
Profit
Sharing
Bonus
Program
of
SIA,
Senior
Management
is
granted
an
individual
bonus
when
achieving
the
target
level
of
the
KPIs
stated.
Hence,
compliance
of
interest
is
rewarded
and
potential
conflict
is
counteracted
in
advance.
Still,
many
members
of
the
board
of
directors
show
some
political
background;
therefore
the
total
separation
and
objectivity
from
the
governmental
institution
can
be
questioned
and
other
non-‐institutional
shareholders
might
be
disregarded.
In
general,
the
company
displays
its
financial
calendar,
as
well
as
its
annual
reports
and
on
its
website
(www.singaporeair.com)
to
inform
its
shareholders
and
ensure
a
close
working
together.
As
the
proportion
of
shares
owned
by
minority
shareholders
is
very
small,
they
might
feel
disregarded.
Hence
management
should
ensure
that
not
only
the
institutional
shareholders
are
pleased,
but
also
minority
interest
is
fulfilled.
5
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Conflict
between
SIA
and
Society
Potential
conflicts
between
society
and
the
company
could
arise
with
regards
to
environmental
aspects.
As
the
airline
industry
contributes
strongly
to
the
amount
of
global
CO2
emissions,
it
is
threatening
habitats
and
affecting
the
climate
change
feared
by
many.
Apart
from
this,
airline
routes
might
affect
occupied
areas
and
lead
to
a
disturbance
of
peace
to
inhabitants.
As
the
government
has
great
control
in
the
company
while
at
the
same
time
representing
the
public,
it
should
also
consider
social
aspect
beside
the
financial
ones.
Conflict between SIA and Market Competition
After
the
financial
crisis,
the
airline
industry,
which
tends
to
be
governed
by
elastic
demand,
faces
strong
competition
and
every
airline
strives
to
gain
a
good
position
in
the
market.
Conflicts
could
arise
from
determining
flight
routes
and
growth
opportunities
of
the
route
network.
Also
fuel
suppliers
and
airports
could
influence
advantages
of
one
airline
over
another.
According
to
a
study
of
the
National
University
of
Singapore:
“SIA
is
adding
more
planes
to
its
fleet
and
upgrading
its
business
class
cabins
as
competition
for
the
Southeast
Asian
market
heats
up.
“(http://rmi.nus.edu.sg/gcr/weekly/WCBMAY14MAY202013.pdf).
This
displays
an
especially
strong
competition
in
Singapore
Airlines’
home
territories
and
a
possibility
of
conflict
of
interest
in
the
area,
also
involving
governmental
influence.
By
being
part
of
Airline
Associations,
such
as
Star
Alliance,
the
company
can
prevent
potential
conflicts
and
instead
reassure
corporation
between
competing
airlines.
Conflict between Company and Government
If
the
government
as
biggest
shareholder
might
instead
of
creating
value,
rather
turn
the
company’s
strategy
to
the
advantage
of
society
by
disregarding
some
potential
financial
prospects,
conflict
could
arise.
Also
with
concern
to
legal
or
tax
regulations,
the
government
would
face
tradeoffs
between
achieving
the
goal
of
shareholder
value
and
fair
representation
of
society’s
interest.
1.3. Interaction with the Market
The firm has appointed an Investors Relation Team, which is in charge of communicating with
investors and special analysts to ensure transparency concerning the company’s value.
Detailed information about shareholders, operating and financial data, price-‐sensitive
information and CEO (Mr. Goh Choon Phong) presentation slides are presented on Singapore
Airlines’ website as well as on SGXNet. Also the annual reports and the agenda can be found
under the company’s website section ‘Investor Relations’. Apart from this, SIA provides an e-‐
mail address, which enables public to contact in case of any concern, intending to ensure
interaction and close relation to everyone interested in the company. Their commitment to
interact with the company’s shareholders and to create a close dialogue can be seen by
Singapore Airlines’ management holding analyst and media briefings when announcing half-‐
yearly and year-‐end results, which will be disclosed as transcripts on the company’s website
as well.
As the company was given the “Most Transparent Company Award” by the Securities
Investors Association of Singapore (“SIAS”) in 2012, their good performance in pleasing its
6
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Principles
14
and
15
(Shareholder
rights
and
responsibilities)
is
proven.
1.4. Social Responsibility & Image Creation
Singapore Airlines intends to create a very positive
and future-‐oriented image to society.
Therefore People Development, Environment and
Community Engagement are part of the annual
reports. Since the airline indrustry is often critizised
for its high carbon dioxide emissions, the company
intents to counter these accusations by following the
4-‐Pillar Strategy of the International Air Transport Association (IATA). The strategy has set the
goal of carbon neutral growth from 2020 onwards. This is only one example published in the
Sustainability Report of Singapore Airlines, which puts effort to operate more
environmentally friendly. Also the company tries to mediate a positive reputation by
supporting initiatives promoting various educational, arts, sports and heritage institutions in
the form of ticket sponsorships, cash contributions, as well as staff involvement. Indeed,
Singapore Airlines Ltd. has been very successful in its publitcity, which is prooven by awards
like being ranked 18th in Fortune Magazine’s annual list of the Top 50 most admired
companies in the world.
Apart from being environmentally comprehensive, the company wants to create an image of
high standards and quality to its customers by stressing the importance of customer service.
This can be seen by the airline’s high standards in cabin equipment and food provided on
board, as well as the traditional and elegant dresscode of its air crew. Also the company’s
membership of various high standard programmes such as KrisFlyer, which provide extra
flight services, implicates its efforts to create a positive bond to its customers.
In general, the company does very well in transmitting its concern and good image to society.
1.5. Breakdown of Shareholders
The majority of Singapore Airlines’ shares are
owned by Temasek Holdings, an investment f
firm owned by the government of Singapore.
The main shareholder is institutional and pays
dividends to its stockholder the Ministry of
finance of Singapore. In general, Temasek holds
a broad portfolio with investments in the
sectors of financial services,
telecommunications, media and technology,
transportation and industrials,
life sciences, consumer, real estate, as well as
energy and resources mainly in Asia.Temasek
has very high corporate credit ratings by many
rating agencies and was scoring well in the
openess of government owned investment
7
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
funds
which
make
it
a
stable
and
secure
main
shareholder.Singapore
Airlines’
strong
institutional
shareholder
base
could
lead
to
the
assumption
that
corporate
governance
is
relatively
strong
and
that
the
rights
of
minority
shareholders
are
well
protected,although
the
number
of
insiders
is
very
low.
As
Temasek
can
be
seen
as
a
well
diversified
marginal
investor,the
CAPM
Model
can
be
applied
to
analyze
the
company’s
risk
and
returns.
The
table,
which
is
additionally
represented
in
the
diagramm,
displays
the
10
main
shareholders
as
well
as
the
remaining
rest
of
the
stockholders
of
Singapore
Airlines.
With
657306600
of
the
1174791796
shares
and
therefore
55,95%,
Temasek
Holding
holds
the
majority
of
shares.
It
is
followed
by
the
Development
Bank
of
Singapore
Limited,
which
is
a
Bank
set
up
by
the
Government
of
Singapore.
Moreover,
the
third
largest
shareholder
is
also
located
in
Singapore.
Due
to
the
fact
that
the
main
shareholders
are
strongly
linked
to
the
country,
it
could
be
assumed
that
also
Singapore
Airlines
Ltd.
Is
linked
to
the
economic
situation
in
Singapore.
Although
the
main
shareholder
is
institutional,
43.97%
of
the
issued
ordinary
shares
of
the
company
are
held
by
the
public,
which
therefore
fulfills
Rule
723
of
the
listing
manual
issued
by
SGX-‐ST,
the
stock
market
on
which
SIA
is
quoted.
Shareholders Number of shares Percent
1) Temasek Holdings (Pte) Ltd 657306600 55,95
2) DBS Nominees Pte Ltd 104843664 8,92
3) Citibank Nominees (Singapore) Pte Ltd 92346328 7,86
4) DBSN Services Pte Ltd 39125145 3,33
5) HSBC (Singapore) Nominees Pte Ltd 31618923 2,69
6) United Overseas Bank Nominees 20399569 1,74
7) Raffles Nominees (Pte) Ltd 17168219 1,46
8) BNP Paribas Securities Services 4985173 0,42
9) Bank of Singapore Nominees Pte Ltd 3934483 0,34
10) OCBC Nominees Singapore 2257515 0,19
973985619 82,9
Rest
11) 200806177 17,1
TOTAL 1174791796 100
Breakdown*of*Shareholders*
0%$
1)$Temasek$Holdings$(Pte)$Ltd$
0%$ 17%$
0%$
$2)$DBS$Nominees$Pte$Ltd$
$3)$CiCbank$Nominees$(Singapore)$Pte$Ltd$
2%$
2%$ $4)$DBSN$Services$Pte$Ltd$
3%$ $5)$HSBC$(Singapore)$Nominees$Pte$Ltd$
$6)$United$Overseas$Bank$Nominees$
3%$
56%$ $7)$Raffles$Nominees$(Pte)$Ltd$
8%$ $8)$BNP$Paribas$SecuriCes$Services$
$9)$Bank$of$Singapore$Nominees$Pte$Ltd$
$10)$OCBC$Nominees$Singaopre$
9%$
11)$Rest$$
8
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Chapter 2 Measures of Corporate Performance
The calculations and ratios of Singapore Airlines Ltd covered in Chapter 2 and 3 can be
compared with the ratios of Air France, Turkish Airlines and Virgin Australia.
A summary of all ratios to be calculated, can be found in the attached excel file.
2.1. Financial Statements and related Measures
The financial statements are presented in Singapore Dollars (SGD) and all values in the tables
are rounded to thenearest million as indicated.
Common-‐size balance sheet
SINGAPORE/AIRLINES/Ltd/BALANCE*SHEET/
(Standardized+Common/Size)
31#Mar#13 31#Mar#14
in/Millons/of/SGD/except/per/share in*% in/Millons/of/SGD/except/per/share in*%
ASSETS
Cash/and/Near/Cash/Items 5.059,6 22,56 4.883,9 21,57
ShortITerm/Investments 349,4 1,56 287,4 1,27
Accounts/&/Notes/Receivable 1.578,4 7,04 1.604,7 7,09
Inventories 274,9 1,23 243,0 1,07
Other/Current/Assets 237,2 1,06 291,7 1,29
Total*Current*Assets 7.499,5 33,44 7.310,7 32,29
LT/Investments/&/LT/Receivables 920,8 4,11 1.217,4 5,38
Net/Fixed/Assets 13.098,0 58,40 13.026,7 57,53
Other/LongITerm/Assets 909,8 4,06 1.087,7 4,80
Total*Long#Term*Assets 14.928,6 66,56 15.331,8 67,71
TOTAL*ASSETS 22.428,1 100,00 22.642,5 100,00
LIABILITIES
Accounts/Payable 3.054,8 13,62 2.972,9 13,13
ShortITerm/Borrowings 73,5 0,33 60,7 0,27
Other/ShortITerm/Liabilities 2.273,3 10,14 2.357,8 10,41
Total*Current*Liabilities 5.401,6 24,08 5.391,4 23,81
LongITerm/Borrowings 944,5 4,21 904,3 3,99
Other/LongITerm/Liabilities 2.679,9 11,95 2.772,2 12,24
Total*Long#Term*Liabilities 3.624,4 16,16 3.676,5 16,24
TOTAL*LIABILITIES 9.026,0 40,24 9.067,9 40,05
EQUITY*
Total/Preferred/Equity 0,0 0,00 0,0 0,00
Minority/Interest 312,6 1,39 337,4 1,49
Share/Capital/&/APIC 1.856,1 8,28 1.856,1 8,20
Retained/Earnings/&/Other/Equity 11.233,4 50,09 11.381,1 50,26
Total*Equity 13.402,1 59,76 13.574,6 59,95
TOTAL*LIABILITIES*AND*EQUITY 22.428,1 100,00 22.642,5 100,00
9
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
The
common-‐size
balance
sheet
for
the
fiscal
periods
April
1,2012
to
March
31,2013
and
April
1,2013
to
March
31,
2014,
as
well
as
all
relevant
calculations
are
shown
in
the
attached
excel
file
Common-‐size income statement
SINGAPORE/AIRLINES/Ltd)INCOME)STATEMENT)
(Standardized+Common/Size)
31#Mar#13 31#Mar#14
in/Millons/of/SGD/except/per/share %)of)sales in/Millons/of/SGD/except/per/share %)of)sales
REVENUE) 15098,2 100 15243,9 100
EXPENDITURE
Staff/costs/ 2353,3 15,59 2336,7 15,33
Fuel/costs/ 5899,4 39,07 5702,1 37,41
Depreciation/ 1589,1 10,53 1575,5 10,34
Impairment/of/property,/plant/and/equipment 9,8 0,06 20,2 0,13
Amortisation/of/intangible/assets/ 22,7 0,15 25,7 0,17
Aircraft/maintenance/and/overhaul/costs/ 539,3 3,57 641,8 4,21
Commission/and/incentives 355,5 2,35 346,6 2,27
Landing,/parking/and/overflying/charges/ 687,8 4,56 716,6 4,70
Handling/charges/ 1006,1 6,66 1038,7 6,81
Rentals/on/leased/aircraft/ 553,6 3,67 649,5 4,26
Material/costs/ 214,2 1,42 223,1 1,46
Inflight/meals/ 543,1 3,60 549,1 3,60
Advertising/and/sales/costs 209,3 1,39 257,6 1,69
Insurance/expenses 43,3 0,29 41,5 0,27
Company/accommodation/and/utilities/ 115,6 0,77 119,1 0,78
Other/passenger/costs/ 158,4 1,05 173,3 1,14
Crew/expenses 148,2 0,98 144,7 0,95
Other/operating/expenses 420,3 2,78 422,8 2,77
Total)Expenditures 14869,0 98,48 14984,6 98,30
OPERATING)PROFIT 229,2 1,52 259,3 1,70
Finance/charges U42,7 U0,28 U37,3 U0,24
Interest/income 62,5 0,41 62,7 0,41
Surplus/on/disposal/of/aircraft,/spares/and/spare/engines/ 56,0 0,37 51,2 0,34
Dividends/from/longUterm/investment 27,3 0,18 19,6 0,13
Other/nonUoperating/items 11,9 0,08 1,9 0,01
Share/of/profits/of/joint/venture/companies 94,9 0,63 94,0 0,62
Share/of/(losses)/profits/of/associated/companies/ 50,4 0,33 U45,2 U0,30
PROFIT)BEFORE)EXCEPTIONAL)ITEMS 489,5 3,24 406,2 2,66
EXCEPTIONAL)ITEMS) U19,9 U0,13 U38,3 U0,25
PROFIT)BEFORE)TAXATION) 469,6 3,11 367,9 2,41
TAXATION) U28,0 U0,19 56,5 0,37
PROFIT)FOR)THE)FINANCIAL)YEAR) 441,6 2,92 424,4 2,78
PROFIT)ATTRIBUTABLE)TO:
OWNERS)OF)THE)PARENT) 378,9 2,51 359,5 2,36
NON#CONTROLLING)INTERESTS) 62,7 0,42 64,9 0,43
BASIC)EARNINGS)PER)SHARE)(CENTS)) 32,2 30,6
DILUTED)EARNINGS)PER)SHARE)(CENTS) 31,9 30,3
The
common-‐size
income
statements
for
the
fiscal
periods
April
1,2012
to
March
31,2013
and
April
1,2013
to
March
31,
2014
are
shown
in
the
attached
excel
file
EBIT (Earnings before Interest and Taxes)
EBIT%=%Revenue%,%COGS%,%Operating%Expenses%,%Depreciation%and%Amortization
EBIT%2014%=% 259,3 1,70%
EBIT%2013%=% 229,2 1,52%
10
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
All
profits
before
subtracting
interest
expenses
and
income
taxes
are
defined
as
EBIT.
By
not
taking
taxes
and
interest
payments
into
account,
the
company’s
ability
and
performance
in
generating
profit
can
be
better
displayed,
which
make
it
easier
to
compare
it
to
the
performance
of
others,
for
instance
competitors.
Net Working Capital
The company’s net working capital is the difference between current assets and current
liabilities. It can be roughly seen as SIA’s potential net reservoir of cash and hence as a
measure of efficiency, as well as disclosure of its short-‐term health.
Net$Working$Capital$=$Current$Assets$4$Current$Liabilities
NWC$2014$=$ 1.919,3 12,59%
NWC$2013$= 2097,9 13,90%
In
the
fiscal
year
2013
it
amounted
to
2097,9
million
SGD
and
13,9%
of
total
assets.
In
FY
2014
net
working
capital
decreased
to
1919,3
million
SGD
with
a
12,59%
proportion
on
total
assets.
Accordingly
Singapore
Airlines’
situation
was
more
fortunate
in
fiscal
year
2013
as
compared
to
the
previous
financial
year’s
performance.
Average Tax rate
Companies pay a corporate tax on their income. Singapore is a leading example of countries
that continue to reduce their tax rate. Accordingly the effective tax rate is one of the lowest in
the world amounting currently to about 17%, which can be seen as advantage compared to
Singapore Airlines competitors (Turkish Airlines with 20.00 % and Air France with 33.30%;
source: http://www.tradingeconomics.com). Also it can be a reason explaining Singapore
Airlines low proportion of debt, as tax benefits are not as strong.
Depending
on
how
much
profit
a
company
makes,
the
average
tax
rate,
which
is
the
total
taxes
owed
divided
by
total
income
can
even
be
negative,
and
a
company
consequently
gets
a
return
payment
by
the
government.
Since
airlines
do
not
tend
to
make
high
profits
and
often
get
a
refund
at
the
end
of
the
year
(a
good
example
is
Air
France),
they
might
create
a
tax
burden
to
government.
Average'Tax'Rate'='Total'Taxes'owed'/'Total'taxable'Income
ATR$2014$=$ *15,36% (=0%)
ATR$2013$=$ 5,96%
11
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Also
Singapore
Airlines
illustrates
this
aspect
in
fiscal
year
2014:
Taxation
of
56,5
million
SGD
in
the
income
statement
was
actually
added
to
the
Profit
of
the
financial
year,
which
displays
a
tax
refund
and
a
0%
(-‐15,36%)
average
tax
rate,
although
the
statutory
tax
payments
according
to
the
tax
rate
would
have
amounted
to
54.2million
SGD
(2013:
55.1million
SGD).
Reasons
could
be
assumed
to
be
tax
benefits
or
former
carried
on
tax
losses,
leading
to
a
lower
or
negative
average
tax
rate.
This
is
also
stated
in
the
annual
Report:
the
use
of
the
tax
losses
is
subject
to
the
agreement
of
the
tax
authorities
and
compliance
with
certain
provisions
of
the
tax
legislation
of
the
respective
countries
in
which
the
companies
operate.
In
FY
2013
the
average
tax
rate
was
5,98%,
amounting
to
a
total
payment
of
taxes
of
28,0
million
SGD.
2.2. Book Rates of Return
It is helpful for managers to measure the firm’s profits per dollar of assets. The book rates of
return (ROE, ROC and ROA) are based on accounting information and helpful to evaluate SIA’s
profitability.
Return on Equity (ROE)
ROE
is
the
income
to
shareholders
per
dollar
invested.
Shareholders
want
the
SIA
to
invest
only
in
projects
for
which
the
return
on
equity
is
higher
than
the
cost
of
equity.
It
can
be
measured
by
as
the
percentage
of
net
income
on
the
shareholder’s
equity.
Return'on'Equity'(ROE):'Net'income'as'a'percentage'of'shareholder's'equity
2014:
ROE&=&Net&Income/Equity&year&beginning&=& 2,68%
ROE'=&Net&Income/Average&Total&Equity&of&2013&and&2014&=& 2,67%
2013:
ROE&=&Net&Income/Equity&year&beginning&=& 2,87%
ROE&=&Net&Income/Average&Total&Equity&of&2013&and&2014&=& 2,81%
SIA’s shareholders earned about 0,027 SGD per 1SGD invested.
Return on Capital (ROC)
While
the
return
on
capital
is
a
return
to
shareholders,
the
return
on
capital
provides
a
measure
of
return
to
all
investors
of
the
company
and
depicts
the
SIA’s
income
available
to
both
debt-‐
and
equity-‐holders
per
SGD
of
long-‐term
capital.
Adding
up
long-‐term
debt
and
shareholders
equity
(stated
in
the
corporation’s
balance
sheet)
can
summarize
long-‐term
capital,
which
is
also
called
total
capitalization.
12
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Return'on'Capital'(ROC)'='After4tax'Operating'Income'/'Average'Total'Capitalization
Average'Total'Capitalization!=!Average!(Long-Term!Debt!+!Equity)!=! 14.412,8
ROC!2014!=! 0,02944615 2,94%
ROC!2013!=! 0,03063954 3,06%
Singapore Airlines has an average total capitalization for the two fiscal years 2013 and 2014 of
14412.8 million SGD. Its After-‐tax operating income was 441.6 million SGD and in 2014 424.4
million SGD. Therefore SIA’s investor earned a rate of return on capital of 3,06% in fiscal year
2013 and a rate of 2.94% in fiscal year 2014(0.0306 SGD (2013) and 0.0294 SGD (2014) per 1
dollar of long-‐term capital). It the rates of return on capital should be superior to the cost of
capital in those years.
Return
on
Assets
(ROA)
SIA’s
return
on
assets
gives
information
about
the
after-‐tax
operating
income
as
a
fraction
of
the
company’s
total
assets.
Total
assets,
which
are
defined
by
adding
total
liabilities
and
total
shareholder
equity)
are
higher
than
total
capitalization
as
current
liabilities
are
included.
To
get
a
more
accurate
measure,
average
total
assets
of
fiscal
years
2013
and
2014
is
calculated
and
amounts
to
22535,3
million
SGD.
Also
for
ROA,
like
for
ROC,
after-‐tax
operating
income,
which
is
calculated
by
adding
after-‐tax
interest
to
net
income,
is
used.
Hence
the
firm’s
profitability
assuming
that
SIA
was
all-‐equity
financed
is
analyzed.
For
fiscal
year
2013
the
return
on
assets
equals
1,96%.
The
after-‐tax
operating
income
slightly
decreased
to
1,88%
of
total
average
assets.
Return'on'Assets'(ROA)'='After0tax'Operating'Income/'Average'Total'Assets'of'2013'and'2014
After0tax'Operating'Income!=!Net!Income!+!After/tax!Interest!=! 2014: 424,4
2013: 441,6
Average'Total'Assets: 22.535,3
ROA!2014!=! 0,01883268 1,88%
ROA!2013!= 0,01959592 1,96%
2.3. Financial Ratios
Market Value Added and Market-‐to-‐Book Ratio
The
market
value
added
is
the
difference
between
the
market
value
of
the
company’s
shares
and
the
amount
of
money
that
the
shareholders
have
invested
in
the
firm.
13
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Market'Value'Added'and'Market.to.Book'Ratio:
Market'Value'Added="(Share"Price*Shares"Outstanding)5"Equity"Book"Value""= 523,01
Market'to'Book'Value'Ratio="Euity"Market"Value/"Equity"Book"Value""= 0,998304566
Singapore
Airlines’
shareholders
have
contributed
about
13574,6
million
SGD
and
ended
up
with
shares
worth
about
13551,5
million
SGD,
hence
the
corporation
has
a
negative
market
value
added
of
–
23,01
million
SGD
and
SIA’s
stock
has
lost
in
value.
The
shareholders
have
invested
more
than
the
cumulative
market
shares
are
worth
at
the
end
of
the
year
2014.
It
could
be
indicated
that
Singapore
Airlines,
as
a
government-‐owned
company
belonging
to
a
low-‐profit
industry,
requires
high
investments,
which
do
not
generate
much
returns.
The
market-‐to-‐book
ratio
compares
the
market
value
of
equity
to
its
book
value
of
equity.
In
the
case
of
Singapore
Airlines
the
initial
investment
of
shareholders
was
reduced
and
has
to
be
multiplied
by
a
factor
of
about
0.998
(<1)
to
get
to
its
market
value
of
equity.
But
as
the
numbers
are
really
close
and
the
equity
book
value
was
taken
from
the
annual
report
at
the
end
of
march
2014,
the
2
values
could
have
a
different
relation
now,
hence
the
company
might
have
a
positive
market
value
added,
as
stock
price
has
increased
since
then.
All
in
all
this
negative
value
is
a
general
overview
and
does
not
depict
how
single
departments
of
the
company
are
doing,
but
instead
it
reflects
shareholders
expectations
of
future
performance
or
the
high
capital
requirements
of
airlines,
which
tend
to
rely
on
governmental
support.
To
get
a
more
detailed
impression
of
how
well
the
company
is
doing,
other
profitability
ratios
should
be
taken
into
account.
Efficiency
Ratios
These
ratios
are
typically
used
to
analyze
how
well
a
company
uses
its
assets
and
liabilities
internally
and
might
therefore
also
help
to
highlight
particular
areas
of
inefficiency.
Also
they
help
to
compare
the
management
performance
of
different
businesses
and
how
profitability
could
be
improved.
Asset
Turnover
Ratio
=
Sales
/
Average
Total
Assets
=
0,676445399
Receivable
Turnover
Ratio
=
Sales/Average
receivables
=
9,57802143
Inventory
Turnover
Ratio
=
COGS*
/
Inventory
year
beginning
=
29,242634
14
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Average
Days
in
Inventory
=
Inventory
year
beginning
/(COGS*/365)
=
12,48
days
Average
Collection
Period
=
Receivables
year
beginning
/
(Sales/365)
=
37,79
days
*As
the
firm’s
Income
Statement
does
not
display
CoGs,
in
accordance
with
the
report
about
Air
France,
the
sum
of
Staff
costs
and
Fuel
costs
(2336,7+5702,1
million
SGD)
was
used
to
compare
Profitability
Ratios
These
measures
of
profitability
give
an
idea
of
how
efficient
sales
are
in
terms
of
profit.
Therefore
they
demonstrate
a
company’s
ability
to
generate
earnings
while
taking
its
operating
expenses
incurring
during
a
specified
period
(in
SIA’s
case
the
last
fiscal
year
2014)
into
account.
The
Profit
margin
depicts
the
proportion
of
sales
which
can
be
counted
as
profits,
while
the
Operating
Profit
Margin
also
take
into
account
the
capital
structure
of
a
company,
as
debt
interest
is
added
back
to
net
income.
Profitability
Ratios
are
useful
when
comparing
a
company
to
its
competitors
or
the
see
how
profitable
a
firm
was
in
different
periods.
The
higher
the
values
of
the
Ratios
are,
the
better
the
profitability
performance.
2,36%
Profit
Margin
=
Net
Income
/
Sales
(0,023583204)
Operating Profit Margin 2,78%
= (Net Income + After-‐tax Interest)/Sales
(0,027840644)
Leverage
Ratios
Leverage
Ratios
measure
how
much
financial
leverage
the
firm
has
taken
on.
Management
takes
them
into
a
account
to
ensure
that
lender’s
requirements
for
further
taking
on
the
firm’s
debt
are
met,
as
the
leverage
ratios
depict
an
overview
of
the
firms
financing
and
its
performance
to
cope
with
financial
obligations.
15
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Long
term
Debt
Ratio
=
Long
term
debt
/
(Long
term
debt
+
Equity)
6,25%
(0,0624564)
Long
term
Debt
Equity
Ratio
=
Long
term
debt
/
Equity
6,66%
(0,0666171)
Total Debt Ratio 40,05%
= Total Liabilities / Total Assets
(0,4004814)
Times
Interest
Earned
=
EBIT
/
Interest
Payments
6,95174263
Cash
Coverage
Ratio
=
(EBIT
+
Depreciation)
/
Interest
Payments
49,8793566
Due
to
the
fact
that
Singapore
Airlines’
Long-‐Term
Debt
is
very
little,
there
is
no
big
difference
between
the
Long
term
Debt
Ratio
and
the
Long
term
Debt
Equity
Ratio.
For
highly
leveraged
company
the
Long
term
Debt
Equity
Ratio
is
much
higher.
Liquidity
Ratios
The
company’s
access
to
cash
or
other
assets
that
can
be
turned
into
cash
or
short
notice
is
measured
by
liquidity
rations.
These
give
credit
analysts
and
bankers
additional
information
about
the
company’s
ability
to
pay
its
short-‐term
debt
obligations.
Security
and
Safety
margin
proportionally
increase
with
the
value
of
the
ratios.
16
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BIB
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Prof.
Dr.
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Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
NWC to Total Assets Ratio 8,48%
= Net Working Capital / Total Assets
(0,084765375)
Current
Ratio
=
Current
Assets
/
Current
Liabilities
1,35599288
Quick
Ratio
=
(Cash
+
Marketable
Securities
+
1,25681641
Receivables)
/
Current
Liabilities
Cash
Ratio
=
(Cash
+
Marketable
Securities)/
0,95917572
Current
Liabilities
It
should
be
remembered
that
these
measures
do
no
take
the
‘reserve
borrowing
power’
of
companies
into
account,
as
for
example
cash
can
be
generated
if
a
firm
has
a
guaranteed
line
of
credit
from
which
it
can
borrow
when
needed.
DU PONT: ROA and ROE breakdown
The Du Pont Formula, named after the chemical company that popularized this procedure, is
a useful tool to think about a company’s strategy. A breakdown of ROA and ROE are
calculated according to slides 99 and 102.
ROA$and$ROE$breakdown
The$DuPont$System:$ROA
ROA!=!(Net!Income!+After!tax!!Interest)/!Assets!=! 0,018743513
ROA!=!(Sales/Assets)!*!((Net!Income!+after!Tax!Interest)/Sales)!=! 0,018743513
ROA!=!Asset!turnover!*!Operating!Profit!Margin= 0,018832676 (difference!by!rounding!)
The$DuPont$System:$ROE
ROE!=!Net!Income!/!Equity!=! 0,02648328
ROE=(Assets/Equity)!*!(Sales/Assets)!*!((Net!Income+After!tax!Interest)/Sales)!*!(Net!Income/(Net!Income+Interest))!= 0,0264833
!!!!!!!!!!!Leverage!Ratio!!!*!!!!Asset!Turnover! !*!!!!!!!Operating!Profit!Margin!!!!!!!!!!!!!!!!!!!!!!!!*!!!!!!!!Dept!Burden
17
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Chapter
3
Risk
Profile
Beta
of
Singapore
Airlines
Top-‐down
ß=
levered
ß
from
Bloomberg:
ß=0.97,
compare
to
Air
France
ß=
1.62
A
good
analysis
for
estimating
the
risk
of
investing
in
a
firm’s
stock
can
be
done
by
looking
at
the
company’s
beta.
It
measures
the
sensitivity
of
a
stock’s
return
to
the
return
on
market
portfolio,
which
has
a
beta
of
1Stocks
with
a
beta
higher
than
1,
react
strongly
to
variations
in
the
market,
whereas
betas
lower
than
1
are
less
volatile
and
hence
less
risky.
Singapore Airlines has a beta of 0,97 (source:bloomberg)
As
it
is
smaller
than
1,
investing
in
SIA
is
less
risky
than
the
market
portfolio
risk
of
a
marginal
investor.
Singapore
Airlines’
beta
is
also
lower
than
the
beta
of
its
competitors.
Air
France
KLM
has
a
beta
of
1,62
and
Turkish
Airlines
displays
a
beta
of
1,10;
both
betas
are
higher
than
SIA’s
beta
of
0,97
and
also
greater
than
1,
therefore
adding
Singapore
Airlines’
stock
to
the
portfolio
seems
to
be
the
least
risky
and
best
choice.
Since
the
beta
of
0,97
is
a
top-‐down
levered
beta
including
statistical
noise,
an
estimation
of
the
true
beta
of
the
company,
not
influenced
by
leverage,
could
serve
as
a
good
comparison
to
other
airline
portfolios
in
the
market.
The
un-‐levered
Beta
of
Singapore
Airlines
will
be
compared
to
the
average
unlevered
beta
of
the
Air
Transport
Industry
(soure:Damodaran).
For
calculations
(see
Excel
File),
the
current
market
value
debt-‐equity
ratio
and
the
17%
statutory
corporate
tax
rate
of
Singapore*
are
used.
*The
0%
average
tax
rate
of
FY
2014
as
a
result
of
carrying
forward
tax
losses,
might
not
be
possible
in
the
future
and
hence
should
not
be
taken
as
average
rate.
Calculations on Excel:
Unlevered Beta: 0,91
Since
Singapore
Airlines’
debt-‐equity
ratio
is
very
small,
the
unlevered
beta
equaling
0,91
does
not
demonstrate
a
big
difference
to
its
top-‐down
beta
of
0,97.Although
when
comparing
it
to
the
average
unlevered
beta
in
the
air
transport
market,
which
is
0,64,
it
seems
to
be
more
risky
to
invest
in
SIA’s
stock.
It
could
also
be
argued
that
the
very
low
average
unlevered
beta
of
the
air
transport
is
a
result
of
the
low
active
trading
of
airline
shares.
The
insufficient
responses
and
insensitivity
to
market
movements
would
mean
low
correlation
with
the
returns
on
the
market
and
thus
lead
to
a
lower
beta.
18
Corporate
Finance
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WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Beta
of
Air
Transport
(source
Damodaran)
The
riskiness
of
a
company’s
stock
also
depends
on
the
proportion
of
debt
and
equity
in
its
capital
structure.
As
Singapore
Airlines
has
very
little
debt
outstanding,
risk
compared
to
other
companies
is
considerately
low.
Therefore
Singapore
Airlines’
levered
beta,
including
its
low
debt
proportion
as
benefit
for
lower
risk,
could
also
be
compared
to
the
average
levered
Air
Transport
Beta.
SIA’s
levered
beta
is
0,97
and
therefore
less
risky
than
the
industry
average
levered
beta
of
1,09.
Correlation Coefficient R2:
The correlation(R) of Singapore Airlines’ individual stock and the Straits Times Index STI,
which is the benchmark index for the Singapore stock market, shown on Bloomberg equals
0,544 leading to a correlation coefficient (R2) of 0.296. The R2of the regression of the
individual stock compared to the portfolio explains what proportion of the variability in total
risk the market can be held responsible for. Hence, it could be estimated that 29,6 % of the
overall risk of the company can be attributed to market risk. In return (1 – R2) = (1 – 29,6%) =
70,04% of the overall risk of Singapore Airlines can be attributed to firm specific risk.
(Source:Bloomberg chanel)
19
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Prof.
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Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Specified
Risk
Fields
In
Articles
38
of
the
Notes
to
Financial
Statements
in
the
annual
report
Singapore
Airlines
defines
the
risks
the
company
has
to
face
and
what
objectives
and
policies
are
implemented
to
ensure
a
stable
and
secure
risk
management.
In
the
case
of
this
globally
operating
company,
derivatives
are
used
to
moderate
the
volatility
effects
of
certain
risks
on
the
company’s
financial
performance.
These
derivatives
can
be
broadly
defined
as
risk
managing
securities,
whose
price
is
dependent
on
the
fluctuations
of
one
or
more
underlying
assets
and
which
can
be
seen
as
future
contracts
between
certain
parties.
As
derivatives
are
used,
the
company
is
not
exposed
to
market
risk:
fluctuating
derivatives
offset
losses
and
gains
on
the
matching
hedged
assets,
liabilities,
revenues
or
expenses.
Financial
risk
management
policies
are
periodically
reviewed
and
approved
by
the
Board
Executive
Committee.
Apart
from
this,
an
annual
review
is
created
by
the
Risk
Management
Department,
which
includes
an
identification
of
the
risks
overseen,
as
well
as
current
und
future
risk
factor
estimations,
and
has
to
be
handed
to
the
Board
Audit
Comittee.
Jet
fuel
Price
Risk
With
concerns
to
operating
successfully,
Singapore
Airlines
strongly
depends
on
jet
fuel
amounting
to
roughly
33
%
of
its
costs
and
its
earnings
are
therefore
highly
affected
by
changes
in
the
jet
fuel
price.
In
order
to
provide
protection
against
significant
and
sudden
increases
in
the
price
of
this
major
resource,
the
company
has
implemented
a
fuel
risk
management
program,
which
allows
the
judicious
use
of
approved
instruments
like
swaps
or
options
within
approved
credit
limits
and
with
approved
collars.
Also
Singapore
Airlines
hedges
up
to
eight
quarters
forward
by
entering
swap,
option
and
collar
contracts
and
applies
cash
flow
hedge
accounting
to
these
derivatives,
as
the
are
considered
very
effective
in
limiting
the
current
and
future
risk
of
fluctuating
jet
fuel
prices.
Foreign Currency Risk
Although the company’ s main operating currency is the Singapore Dollar, as a globally acting
company, exchange rate fluctuations have to be considered. This is due to the fact that they
effect Singapore Airlines’ foreign currency denominated operating revenues and expenses,
which in fiscal year 2014 were around half of the accounted revenue (53,1%) and about
66,9% of total operating expenses. The company’s largest exposures come from United States
Dollar, Euro, UK Sterling Pound, Swiss Franc, Australian Dollar, New Zealand Dollar and major
Asian currencies. Singapore Airlines generates a surplus in all of these currencies except the
US Dollar, whose deficit is mainly caused by payments of fuel and aircraft leasing costs, as
well as capital expenditures, which are all mostly denominated in USD.
Surpluses of convertible currencies are sold, as soon as practicable, for USD and SGD. The
Company also uses forward foreign currency contracts and foreign currency option contracts
to hedge a portion of its future foreign exchange exposure by for example using financial
instruments to hedge the expected future payments. In addition, cross currency swap
contacts, where Singapore Airlines pays in Singapore Dollars and receives US Dollar at rates
between 1.3085 to 1.6990, are especially used to reduce the foreign exchange risk on its US
dollar denominated finance lease commitments.
All in all the Company applies a foreign currency sensitivity analysis on outstanding foreign
20
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Finance
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Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
currency
hedging
contracts
and
significant
outstanding
foreign
currency
denominated
monetary
items
to
get
an
overview
of
the
effects
of
changes
in
the
strength
of
the
Singapore
Dollar.
.
Interest
Rate
Risk
Changes
in
the
interest
rates
also
have
an
impact
on
the
company’s
earnings
because
a
change
can
create
differences
in
the
interest
income
and
expenses
of
interest-‐bearing
assets
and
liabilities.
In
order
to
avoid
this
interest
rate
risk,
Singapore
Airlines
enters
into
interest
rate
swap
contracts
and
interest
rate
cap
contracts
to
manage
interest
rate
costs
on
its
financial
assets
and
liabilities.
At
the
end
of
fiscal
year
2014,
excluding
the
special
instruments
entered
into
by
the
Company,
Singapore
Airlines
had
interest
rate
swap
agreements
in
place,
where
fixed
rates
of
interest
ranging
from
3.00%
to
3.45%
and
the
receiving
a
variable
rate
linked
to
LIBOR
were
set.
To
cope
with
the
risk
of
fluctuations
in
the
interest
rates,
the
company
also
uses
an
interest
rate
sensitivity
analysis
to
summarize
the
effects
of
increases
or
decreases
in
market
interest
rates
of
one
basis
point
for
all
currencies
it
operates
in.
Market Rate Risk
Since the company has high investments of for example $1313.7 million SGD in fiscal year
2014, it is exposed to market risk. In case of changes in the global economy, decreasing
market prices could lead to potential losses in the value of these investments.
To estimate the effects of this risk, Singapore Airlines uses a market price sensitivity analysis
Liquidity
Risk
At
the
end
of
Fiscal
year
2014
the
company
recorded
cash
and
short-‐term
deposits
amounting
to
4883,9
million
SGD.
In
addition,
the
Group
has
available
short-‐term
credit
facilities
of
about
300
million
SGD
and
Medium
Term
Note
Programs
with
varying
maturities,
under
which
it
may
issue
notes
up
to
2000
million
SGD
and
of
which
1500
million
were
not
yet
utilized
at
the
last
day
of
fiscal
year
2014.The
amount
of
cash
and
short-‐term
deposits
Singapore
Airlines
holds,
together
with
committed
funding
facilities
and
net
cash
flow
from
operations,
are
expected
to
be
sufficient
to
cover
the
cost
of
all
firm
aircraft
deliveries
due
in
the
next
financial
year.
All
in
all
the
company
is
well
positioned
in
the
regulation
of
liquidity
related
subjects
and
therefore
not
strongly
affected
by
liquidity
risk.
Credit
Risk
To
cope
with
credit
risk,
Singapore
Airlines
has
appointed
an
independent
Group
Debts
Review
Committee
to
review
the
follow
up
actions
on
outstanding
receivables
each
month.
Apart
from
this,
the
company
creates
control
over
credit
risk
by
holding
the
respective
finance
divisions
responsible
for
measuring
and
managing
specific
risk
exposures.
T
he
maximum
exposure
to
credit
risk
for
the
Group
and
the
Company
is
represented
by
the
carrying
amount
of
each
financial
asset
in
the
statement
of
financial
position.
No
significant
credit
risk
concentrations
besides
the
risk
of
derivative
counterparties
are
stated
by
the
21
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BIB
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-‐
Prof.
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Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
company
and
they
even
counteract
this
risk
by
limiting
these
transactions
to
financial
institutions
with
high
credit
quality,
hence
the
risk
of
default
is
low.
Also
the
credit
risk
of
sales
agents
is
very
small,
due
to
broad
diversification
and
their
accreditation
through
the
International
Air
Transport
Association
(IATA),
as
well
as
the
settlement
of
receivables
and
payables
at
weekly
intervals.
In
addition
the
firm
makes
use
of
credit
reports
and
obtains
historical
data
from
previous
business
relations,
especially
with
regard
to
payment
behavior,
in
order
to
avoid
non-‐performance
and
eventually
successfully
counteract
credit
risk.
Counterparty
Risk
As
the
company
operates
within
a
network
of
various
stockholders,
it
has
to
face
counterparty
risk.
This
risk
is
defined
as
the
potential
financial
loss
from
a
transaction
that
arises
due
to
default
by
the
counterparty.
Singapore
Airlines
manages
counterparty
risks
by
regular
reviews
and
adjustments
on
these
risk
exposures,
which
eventually
decrease
the
material
loss
arising
from
the
event
of
nonperformance.
Also
it
determines
concentrations
of
credit
risk
by
monitoring
the
industry,
country
and
credit
rating
of
its
individual
counterparties.
Risk due to Rising Competition
The airline industry is a highly competitive market and especially the Asian market is heating
up. This trend can be for example depicted by the active competition of the company’s
Persian Gulf rivals for premium passengers. Singapore Airlines faces greater competition on
Europe-‐Asia routes as Emirates Airline and Qatar Airways Ltd. leverage more convenient
hubs. Also they are stocking up their flight service and equipment to win Singapore Airlines’
traditional premium passengers with improved standards. On the other side the risk of low-‐
cost operators, such as Air Asia Bhd, poaching budget travelers. Also regional and economy
travelers are being targeted by low-‐fare airlines such as AirAsia and Qantas Airways Ltd.’s
Jetstar. As a response to this risk Singapore Airlines has increased its fleet and routes network
and implemented new flight and cabin services. Also Singapore Air’s management has
increased the company’s presence in the low-‐cost market by for example setting up a long-‐
haul operator (Scoot) with budget flights to destinations like Bangkok or Sidney or by the
acquisition of shares of Tiger Air (TGR). The risk of competition has to be continuously
overseen and responded.
Chapter 4 Performance Profile
General Information
Singapore Airlines’ stock symbol is SIA and it is listed and traded in the Mainboard on
Singapore Stock Exchange (SGX). As at the 31 of December 2014 the number of total issued
shares (excluding Treasury shares) was 168.240.100.
22
Corporate
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BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
The
company
has
a
5
year
dividend
growth
of
15,44%.
SIA’s
dividend
indicated
gross
yield,
meaning
the
annual
return
on
an
investment
in
SIA’S
stock
prior
to
taxes
and
expenses
divided
by
the
current
price
of
the
investment,
amounts
to
1,27%.
Also
the
performance
was
very
good
in
the
last
fiscal
year
2014:
in
its
report
Singapore
Airlines
stated
earnings
of
30.6
Cents
per
share
and
management
recommended
a
final
dividend
of
11
cents/
share
and
an
interim
dividend
of
10
cents/
share.This
positive
performance
was
also
seen
in
the
payment
of
a
special
dividend
of
25cts/share
to
the
company’s
shareholders.
Shareholders in FY 13/14
benefited from higher
dividends, if their
investment was done
earlier.
(source: annual report 13/14)
Performance of SIA’s stock
Stock
Price
development
of
SIA
over
the
last
5
years
(source :http://www.reuters.com/finance/stocks/chart?symbol=SIAL.SI)
To
understand
Singapore
Airlines
Ltd.’s
stock
portfolio,
it
is
helpful
to
evaluate
its
performance
according
to
stock
charts
and
draw
a
comparison
to
other
relevant
stocks
and
indexes.
When
having
a
look
at
the
5-‐year
performance
of
Singapore
Airlines’
stock,
a
strong
and
sudden
price
downfall
in
2011
can
be
noticed.
A
reason
could
be
the
August
2011
Stock
Markets
Fall,
which
led
to
a
sharp
drop
in
stock
prices
in
August
2011
in
stock
exchanges
across
the
United
States,
Middle
East,
Europe
and
Asia.
This
was
due
to
fears
of
contagion
of
the
European
sovereign
debt
crisis.
Also
Singapore
Airlines
was
through
its
flight
routes
more
exposed
to
the
weak
European
economy
compared
to
other
Asian
airlines.
After
this
date,
23
Corporate
Finance
BIB
WS14/15
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Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
SIA’s
stock
price
development
was
roughly
balancing
at
a
price
of
10,50
SGD.
In
the
last
quarter
of
2014
the
graph
displays
a
starting
recovery
of
SIA’s
stock
price,
which
might
have
resulted
from
the
falling
jet
fuel
prices
and
hence
a
higher
expected
profit
margin
for
the
firm.
This
performance
can
be
also
depicted
in
the
1-‐year
summary
of
the
company’s
stock.
In
the
chart
SIA’s
performance
is
compared
to
the
Straits
Times
Index,
which
is
regarded
as
the
benchmark
index
for
the
Singapore
stock
market.
Singapore
Airlines
stock
depicts
more
volatile
phases,
but
was
following
the
indexes’
performance
until
August,
when
a
decline
in
SIA’S
stock
price
is
displayed.
From
the
end
of
October
on,
as
seen
in
the
5-‐year
summary,
Singapore
Airlines’
shares
experienced
a
growth
development.
The
stock
outperformed
the
Straits
Times
Index
and
ended
2014
with
29,5%
increase
in
price,
whereas
the
index
only
depicts
a
third
of
this
growth.
Stock
price
performance
of
Singapore
Airlines
in
comparison
to
the
Straits
Times
Index
(http://www.bloomberg.com/quote/SIA:SP)
In
order
to
understand
how
well
a
company’s
stock
is
performing,
it
is
useful
to
compare
it
to
others
in
the
industry.
The
chart
below
shows
the
development
of
SIA’s
stock
in
2014
compared
to
the
stock
of
Air
France
KLM
and
the
stock
of
one
of
Singapore
Airlines’
strong
competitors
Emirates.
As
a
mature
well
performing
company
not
creating
any
major
expectations,
SIA’s
stock
indicates
the
most
stable
and
smooth
development
outperforming
Air
France’s
stock
growth
from
July
on.
Although
Emirates
stock
depicts
higher
growth
throughout
the
year,
its
higher
volatility
eventually
results
in
a
minimal
higher
growth
of
about
30,8%
as
compared
to
SIA’s
closing
with
29,5
%
increase
in
stock
price.
Hence
investing
in
SIA’s
stock
in
the
last
year
as
compared
to
investing
in
the
market
would
have
lead
to
higher
returns.
24
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Stock
price
performance
of
Singapore
Airlines
in
comparison
to
the
stocks
of
Air
France
KLM
and
one
of
its
main
competitors
Emirates
(http://www.bloomberg.com/quote/SIA:SP)
Latest
Developments
As
on
March
31
2014
the
company
had
an
amount
of
4883,9
million
SGD
cash
on
its
balance
sheet,
although
the
airline
industry
is
infamous
for
high
capital
expenditures.
This
led
Singapore
to
the
issuance
of
a
special
dividend
and
was
more
than
doubling
the
company’s
dividend
payout.
Apart
from
this
the
company
has
enough
cash
to
pay
out
the
regular
set
dividends
for
more
than
a
decade,
which
can
be
assumed
to
be
an
advantage
for
SIA’s
stockholders.
The
high
cash
balance
of
Singapore
Airlines
also
gave
the
rise
to
the
company’s
repurchase
of
its
own
shares
in
the
last
months
after
renewing
its
buy-‐back
mandate.
Currently
it
has
about
29
million
treasury
shares
worth
more
than
280
million
SGD.
These
actions
might
lead
to
the
assumption
that
the
management
wants
to
signal
to
investors
that
SIA’s
stock
is
a
bargain,
as
the
price
it
cheap
making
it
worth
to
invest.
The
last
developments
of
the
stock
price
analyzed
earlier,
support
this
belief.
In
contrast,
the
share
repurchase
and
special
dividends
could
be
interpreted
as
missing
growth
opportunities
for
Singapore
Airlines
and
thus
lead
to
the
distribution
of
its
cash.
25
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Chapter
5
Cost
of
Equity,
Cost
of
Debt
and
Cost
of
Capital
5.1.
Cost
of
Equity
The
Cost
of
Equity
of
Singapore
Airlines
is
calculated
using
the
Capital
Asset
Pricing
Model
(CAPM).
KE=
risk
free
rate
+
Beta
x
Market
risk
premium
-‐>
Market
risk
premium
=
Return
of
market
portfolio
–
risk
free
rate
Risk
free
Rate
The
risk
free
Rate
can
be
estimated
by
taking
the
interest
rate
of
a
risk
free
asset,
such
as
a
government
bond.
Risk-‐free rate = 2,36% (Rate on 10-‐year SGD Government Bonds: Sept. 2014)
Beta
Beta
measures
the
sensitivity
of
a
stock’s
return
to
the
return
on
market
portfolio.
It
depends
on
the
proportion
of
Debt
and
Equity
in
the
Capital
Structure
of
the
Company.
As
Singapore
Airlines
has
very
little
debt
outstanding,
risk
compared
to
other
companies’
is
considerately
low.
Beta = 0,97 (source: Bloomberg)
<1, investing in SIA is less risky than the diversified market portfolio risk of a marginal investor
Risk premium Singapore:
Premium
expected
for
in
investing
in
risky
asset.
How
much
expected
return
demanded
to
invest
in
company’s
stock
instead
of
risk
free
assets,
such
as
bonds
Market risk premium = 5,75% for Singapore (source: Damodaran)
Calculation:
(Also
included
in
Excel
File)
KE=
2.36%
+
0.97
x
5.75
%
=
7.94%
Singapore
Airlines
Ltd
has
to
deliver
a
return
of
at
least
7.94%
(stock
price
increase
+
dividends),
to
secure
a
„break-‐even”
of
its
investors.
Moreover,
the
7.94%
return
is
the
„hurdle
rate“
for
SIA
stockholders;
therefore
it
can
be
interpreted
as
the
compensation
required
for
bearing
the
risk
associated
with
SIA’s
stock.
Hence,
the
company’s
cost
of
equity
equals
7.94%
26
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
5.2.
Cost
of
Debt
After-‐tax
Cost
of
Debt
The
Cost
of
Debt
represents
what
Singapore
Airlines
would
have
to
pay
when
issuing
new
debt;
therefore
it
represents
the
expense
per
new
SGD
borrowed.
KD=
=
pre-‐tax
cost
of
debt
x
(1-‐
Tax
rate)
As
no
yield
to
maturity
of
the
company
bonds
outstanding
can
be
found
and
Singapore
Airlines
is
not
rated,
a
synthetic
rating
to
further
calculate
the
market
debt
is
created.
This
is
done
by
using
the
financial
characteristics
of
the
firm
and
by
developing
the
rating
from
the
interest.
Calculation:
(Also
included
in
Excel
File)
Interest
Coverage
Ratio
=
EBIT
/
Interest
Expenses
=
6,951742627
The
S&P/Moody’s
Rating
derived
is
AA
and
results
in
a
Default
Spread
of
=0,70%.
Therefore
SIA’s
pre-‐tax
cost
of
debt
amounts
to
3,06%.
KD=
3,06%
x
(1-‐
0%)=
3,06%
Considering
its
tax
rate
0
%,
Singapore
Airlines’
did
not
benefit
of
any
tax
shield
in
fiscal
year
2014,
therefore
its
current
after-‐tax
cost
of
debt
equals
its
pre-‐tax
cost
of
debt.
The
Company’s
current
cost
of
debt
(3,06%)
is
below
its
cost
of
equity
(7,94%).
A
reason
might
be
the
considerably
low
debt
proportion
and
the
resulting
lower
risk,
which
makes
it
less
costly
to
issue
new
debt.
The
low
cost
of
debt
of
SIA
could
be
put
in
contrast
to
the
high
cost
of
debt
of
Air
France,
which
amounts
to
10,34
%.
It
could
be
argued
that
this
is
due
to
their
high
debt
outstanding
and
hence
a
lower
rating.
27
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Future
Cost
of
Debt
For
the
future
cost
of
debt,
it
can
be
assumed
that
losses
and
tax-‐loss-‐carrying
forward
with
a
resulting
tax
advantage
might
not
last
forever,
therefore
the
after-‐tax
cost
of
debt
for
future
issuing
could
be
estimated
by
considering
Singapore’s
corporate
tax
rate
of
17%
Future after-‐tax cost of debt: KD= 3,06% x (1-‐ 0.17)= 2,54%
5.3. Cost of Capital
The Cost of Capital is a composite cost to the firm of raising financing to fund its projects. In
addition to Equity, firms can raise capital from debt.
Weighted Average Cost of Capital (WACC):
The debt-‐equity-‐ratios were calculated by taking the market value of debt and the market
value of equity (Calculations in Excel).
For the calculation of the market value of equity, data from bloomberg.com and reuters.com
were compared. Eventually, I decided to stick to the values stated on Singapore Website, as
the date is very current and it seemed to be a reliable source and in fit with the shareholder
breakdown. (Number of shares and share price from 31. December 2014). The market value
of equity was estimated by calculating the product of total shares outstanding (1168240100)
and the share price at closing (11,60SGD).
The information for the market value of debt was taken from to Notes to Financial
Statements in the Annual report: the market value of traded bonds outstanding (Notes 2020
& Notes 2015) was added to non-‐current loans and finance lease-‐commitment.
Calculation:
E/(D+E) market value = 93,66%
D/(D+E) market value = 6,34%
KD= 3,06% (current cost of debt without benefits from tax shield)
KE= 2.36% + 0.97 x 5.75 % = 7,94%
WACC = 7,94% x 93,66%+ 3,06% x 6,34% = 7,63%
28
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Chapter
6
Projects
of
the
Company
6.1.
Typical
Projects
In
order
to
achieve
the
company’s
goals
of
growing
and
creating
value,
it
is
essential
that
its
management
is
capable
to
identify
and
choose
projects
with
a
positive
net
present
value,
which
create
returns
higher
than
the
initial
capital
spent.
Singapore
Airline’s
typical
and
current
projects
should
thus
also
own
these
characteristics.
The
typical
projects
of
an
airline
can
be
divided
into
the
airline
business
projects
and
projects
concerning
the
ground
operating
business,
such
as
the
operation
and
maintenance
of
the
hub
airport
and
all
related
facilities.
The
airline
business faces
projects
like
fleet
acquisition
or
leasing
of
new
airplanes,
which
requires
long
term
financing,
as
the
airplanes
are
assets
with
a
long
life.
At
the
end
of
fiscal
year
2014,
Singapore
Airlines’
operating
fleet
consisted
of
142
aircraft,
133
passenger
aircraft
and
9
freighters.
The
purchase
of
new
fleet
requires
high
initial
investments,
which
have
to
be
planed
in
advance,
as
airplane
delivery
occurs
later
in
time
and
long-‐term
cash
outflows
for
maintenance
should
be
taken
into
account.
In
the
last
financial
year
for
example
Singapore
Airlines
announced
the
purchase
of
30
additional
Airbus
A350-‐900
aircraft,
plus
options
to
acquire
20
more,
and
apart
from
that
30
Boeing
787-‐10
aircraft.
Singapore
Airlines
outstanding
aircraft
orders
amounted
to
118
as
at
31
March
2014.
Whereas
leasing
on
the
other
hand
requires
smaller
long-‐term
payments
set
for
a
certain
period.
The
Company
for
example
has
3
B777-‐200,
3
B777-‐200ER,
2
B777-‐300,
26
A330-‐300
and
9
A380-‐800
aircraft
under
operating
leases
with
fixed
rental
rates.
The
original
lease
terms
range
from
5
to
10.5
years
with
the
possibility
to
extend.
Also
other
segments
like
SIACargo
and
SilkAIr
have
leasing
contracts
for
their
air
fleet.
Also,
with
concerns
to
its
fleet,
an
airline
needs
to
decide
between
mutually
exclusive
projects.
With
rising
fuel
prices,
it
has
to
decide
whether
to
replace
fuel
inefficient
older
fleet
or
choose
to
use
its
capital
to
expand
the
existing
fleet.
These
developments
can
be
seen
by
the
change
of
its
fleet
composition:
In
the
last
fiscal
year
6
additional
Airbus
A330-‐300
aircraft
and
3
Boeing
777-‐300ER
where
delivered
upon
former
order
and
5
Airbus
A340-‐500
and
4
Boeing
777-‐200
aircraft
left
the
company’s
operating
fleet.
Singapore
Airlines
compared
to
other
airlines,
has
a
very
modern
fleet,
therefore
these
tradeoffs
in
the
existing
fleet
have
to
be
estimated
constantly.
The
most
typical
project
of
Singapore
Airlines
is
its
flagship
plane
Airbus
380,
as
it
was
the
first
airline
introducing
it.
Another
project
is
the
opening
of
new
routes
or
the
increase
of
capacity
of
certain
routes,
which
also
require
long-‐term
financing
and
payments
in
different
currencies.
For
example
in
FY
14
SIA
also
introduced
the
A380
to
Shanghai,
operating
five
times
weekly
and
thus
increasing
capacity
on
the
route
by
12
percent
29
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
In
addition
a
typical
project
of
an
airline
can
be
the
set
up
of
new
bases,
long-‐term
projects
with
the
opportunity
of
growth
as
it
might
lead
to
the
expansion
of
its
routes.
These
would
require
long-‐term
financing
in
the
currency
of
the.
Apart
from
that
an
airline
company
might
choose
the
project
of
constructing
a
new
terminal
and
its
maintenance,
which
are
also
long-‐term
and
involve
cash
flow
in
a
single
currency
in
the
country
the
terminal
is
set
up,
hence
this
project
might
be
affected
by
macroeconomic
factors.
The
projects
concerning
the
operating
business
in
the
airlines
hub
involve
medium
and
long-‐
term
payments,
which
are
mainly
payments
in
a
single
currency,
for
SIA
it
is
the
Singapore
Dollar.
For
example
salaries
to
the
staff
or
payments
to
local
companies
require
long-‐term
payments
in
the
local
currency
SGD,
therefore
could
be
long-‐term
financed
by
long-‐debt
issued
in
SGD,
which
is
influenced
by
macroeconomic
risk.
It
could
be
evaluated
whether
Singapore
Airlines
is
able
to
cope
with
the
inflation
of
the
country
and
thus
make
a
decision
which
long-‐
term-‐
financing,
floating
rate
or
a
fixed
rate
on
its
long-‐term
debt
in
SGD
should
be
chosen
for
these
cash-‐outflows.
The
cash
inflows
might
be
considered
volatile
when
depending
on
passenger
numbers
and
fixed,
as
other
airlines
pay
fixed
amounts
for
the
service
and
facilities
they
use.
For
many
of
the
airlines’
projects
the
typical
cash
flow
patterns
display
a
long
timespan,
as
its
investments
mostly
consist
of
long-‐life
assets.
A
longer
period
between
the
considerable
high
initial
cash-‐outflow
and
breakeven
could
occur.
After
that
a
constant
positive
return
considering
further
maintenance
costs
and
the
advantage
of
cash
due
to
depreciation
can
be
expected.
6.2.
Performance
of
current
Projects
In
order
to
analyze
the
performance
of
Singapore
Airline’s
projects
comparisons
of
ROE
vs.
Cost
of
Equity
and
ROC
vs.
WACC,
are
useful
indications.
Fiscal
Year
2014:
(Calculations
Excel)
Economic'Value'Added'='Operating'Income6'(Cost'of'Capital*Total'Capitalization) (Project)Evaluation)
EVA= 2836,07
Return
on
Equity:
2,67%
<
Cost
of
Equity:
7,94%
Return
on
Capital:
2,94%
<
Cost
of
Capital(WACC)
:
7,63
%
Both
comparisons
show
that
the
company
did
not
fulfill
the
given
expectations
of
its
capital
providers.
Apart
from
that
Singapore
Airlines
displays
a
negative
Economic
Value
Added.
But
30
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
these
measures
can
only
be
used
to
some
extent,
for
instance
SIA
has
a
much
higher
ROE
than
the
industry
average
of
-‐10.94
(source
yahooo.finance),
hence
considering
to
the
industry
they
are
operating
in,
it
could
be
assumed
that
SIA’s
management
better
decisions
by
picking
projects
with
positive
NPV.
Other
indicators
for
the
goodness
of
projects
should
also
be
considered.
Therefore,
the
measures
could
also
be
caused
by
the
high
initial
investments
and
thus
higher
capital
expenditures
in
this
financial
period.
This
can
be
seen
in
Singapore
Airlines’
annual
report,
where
the
company
stated
an
increase
of
capital
expenditures
of
37,3
%
compared
to
the
last
year,
from
which
about
97%
of
capital
where
spend
on
aircraft
spares
and
spare
engines.
These
typical
projects
might
not
have
reached
break
even
yet,
but
their
Net
Present
Value
could
still
be
positive
despite
the
negative
estimations
on
performance.
All
in
all,
Singapore
Airlines
could
do
well
in
the
future
with
its
various
new
investments
and
current
projects,
as
according
to
the
International
Air
Transport
Association
(IATA)
Asia
Pacific
and
West
Asian
airlines
are
expected
to
dominate
the
international
passenger
market
and
to
have
high
profit
margins,
while
the
American
and
European
markets
are
declining.
Another possibility to
elaborate the company’s
performance could be a
comparison of its current
available seat capacity, and the
passenger traffic and load
factors to former years.
Revenue Passenger-‐km has
steadily increased, which could
be interpreted as a result of
the companies’ successful investment projects in new and efficient aircraft.
31
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
6.3.
Future
Projects
Due
to
the
fact
that
the
air
transport
market
calls
for
more
and
more
cheap
flights,
Singapore
Airlines
might
in
the
future
consider
changing
or
expanding
its
customer
target
group.
Currently
it
is
mainly
putting
its
focus
on
high
standard
requesting
passengers
and
providing
them
with
a
high-‐quality
board
service
and
equipment.
But
as
competition
rises
and
many
of
its
traditional
passengers
consider
other
airlines,
such
as
Qatar
Airways
or
Emirates,
the
company
might
choose
as
a
future
project
to
acquire
or
invest
in
low-‐cost
airlines
instead
of
focusing
only
on
high
quality.
The
company
has
already
started
this
process
by
launching
its
own
low-‐cost
long-‐haul
airline
Scoot
or
by
investing
in
Tiger
Air
(TGR).
Chapter 7 Financing Profile
The company’s capital structure should maintain an
efficient mix of debt and equity and should be regularly
reviewed and adjusted to economic conditions by the
Directors. Factors determining Singapore Airline’s capital
structure are a low cost of capital, keeping possession of
financial flexibility for possible opportunities and
maintenance of a certain level of liquidity. For the
monitoring of its capital, the company uses a D/E+D-‐ ratio of 0,07.
(source: annual report 13/14,p.200)
As the graph below shows, SIA’s low debt level (blue) was even reduced in the last years, thus
the amount of equity (orange) increased.
32
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
It
could
be
assumed
that
this
is
due
to
the
firm’s
conservative
financing
strategy
and
the
large
institutional
shareholder.
The
government
might
want
to
keep
a
certain
level
of
control
within
the
company’s
decisions
processes
by
not
granting
the
company
more
flexibility
in
its
capital
structure.
Thus,
there
might
be
limitations
on
the
company’s
own
debt
financing.
(source:
http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=singf)
Debt
The
company
is
mature
and
mainly
takes
on
predictable
long-‐term
business
projects;
hence
the
financing
should
focus
on
long-‐term
debt
instruments.
At
the
end
of
FY14
Singapore
Airlines
Balance
sheet
displayed
965
million
SGD
of
debt,
where
all
types
of
debt
financing
(loans,
notes
payable
and
other
borrowings)
were
initially
recognized
at
their
fair
value.
Singapore
Airlines
took
the
possibility
to
raise
funds
by
issuing
unsecured
notes
and
bonds
(Notes
Payable).
On
March
31,
the
company
recorded
500
million
SGD
fixed
rate
notes
(Series
001
Notes),
which
are
due
on
July
9
2020
and
bear
a
fixed
interest
rate
of
3,22%
per
year.
Also
it
has
300
million
SGD
bonds
outstanding,
which
have
a
fixed
interest
of
2,15
%
per
year
and
are
repayable
on
September
2015.
Both
financing
types
add
up
to
800
million
SGD
in
Notes
Payable.
(Currently
the
company
has
issued
2
new
bonds,
which
are
repayable
in
2021
and
2024,
these
were
not
had
not
been
issued
yet
at
the
end
of
FY14,
but
were
taken
into
consideration
for
the
current
market
value
of
debt.)
Bonds
are
a
good
way
for
the
corporation
to
finance
long-‐term
investments.
The
advantages
of
bonds
are
the
usually
lower
interest
rates
compared
to
other
debt
financing
instruments
and
furthermore
the
interest
can
be
deducted
as
expenses
from
tax
payments.
In
addition
to
bonds
and
notes,
the
company
also,
through
its
subsidiary
companies,
has
taken
loans.
Firstly
it
has
a
revolving
credit
facility
denominated
in
US-‐Dollars
taken
on
by
SIA’s
subsidiary
on
its
behalf.
It
is
unsecured
and
bears
a
fixed
interest
of
2,50%,
apart
from
that
it
should
be
repaid
within
12
months
after
taken
out.
As
this
financing
method
is
a line
of
credit
where
the
customer
pays
a
commitment
fee
and
is
then
allowed
to
use
the
funds
when
they
are
needed,
it
is
a
good
way
for
Singapore
Airlines
operation
expenses,
as
they
might
be
fluctuating
and
result
in
different
cash
needs.
33
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Furthermore,
it
has
an
unsecured
long-‐term
loan
denominated
in
US-‐Dollars
taken
by
a
subsidiary
company,
which
bears
an
average
annual
floating
rate
of
1,47%
and
has
to
be
repaid
by
29
April
2022.
The
company
also
has
outstanding
debt
due
to
4
unpaid
lease
agreements
obliged
by
its
business
segment
SIA
Cargo.
Interest
on
three
of
SIA
Cargo’s
finance
lease
commitments
are
charged
at
a
margin
above
the
London
Interbank
Offered
Rate
(“LIBOR”)
and
range
from
0.27%
to
1.12%.
The
fourth
finance
lease
commitment
has
a
fixed
annual
interest
rate
of
5.81%.
This
long-‐term
debt
financing
suits
well
to
aircrafts,
as
long-‐life
assets
and
to
circumvent
the
high
initial
investments
required
when
purchasing.
All
in
all,
Singapore
Airlines’
very
low
debt-‐to-‐equity
ratio
keeps
the
lenders
control
in
the
company
and
claims
on
its
cash
flows
considerately
little.
Equity
In
order
to
raise
funds,
public
traded
companies
like
Singapore
Airlines
can
issue
shares
to
create
additional
capital.
In
contrast
to
debt
financing,
there
is
no
benefit
in
terms
of
taxes.
The company stated in the annual
report 13/14 to have issued a number
of 1199851019 ordinary shares.
(I stick to book values this case in
order to compare it to the debt of that time recorded in the report).
From these shares, around 2,09% were
Treasury Shares amounting to 25059223 shares in total, which are repurchased by the firm.
The rest of the shares are 1174791796 ordinary shares owned by the company’s
shareholders, which include 1 vote per share. Apart from ordinary shares, the company has
issued another class of share: 1 special share, which is held by the Minister of Finance.
Singapore Airlines’ external financing mainly consists of equity, as its total capital amounts to
13237.2 million SGD. As the shareholders are the owners of the shares issued, they are
granted to vote the management of SIA, which seems to be under tight control.
Advantages and Disadvantages of using Debt
To further evaluate the low debt ratio and SIA’s past reduction of debt, the company’s
advantages (tax benefits, added discipline) and disadvantages (bankruptcy costs, agency
costs, less flexibility, net t of taking on debt in order raise capital should be considered.
34
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Singapore
has
among
the
lowest
corporate
tax
rates
(17%)
in
the
world,
therefore
the
incentive
for
a
high
debt
ratio
in
order
to
receive
tax
benefit
is
lower
than
compared
to
its
competitors.
Apart
from
that,
in
the
past
fiscal
year
SIA
had
an
average
tax
Tax
benefits
rate
of
0%,
due
to
tax
losses
carried
forward.
(Cost
of
capital
calculations)
It
is
possible
that
the
company
might
not
pay
any
taxes
in
the
next
years
and
hence
issuing
more
debt
would
not
create
any
advantage
to
the
firm.
As Singapore Airlines has a very strong main institutional
shareholder (government), management is already under control
Added discipline and the company is well regulated. The added discipline of new
issued debt does therefore not play a significant role.
Due to the fact that SIA has a stable high cash base and has
issued special dividends, it can be assumed that the company is
well positioned and that the event of bankruptcy in near future is
unlikely. Also the company is overseen by its biggest shareholder,
Bankruptcy costs the Government of Singapore, people might be confident about
the company’s situation, thus indirect bankruptcy costs are low.
Hence increasing its debt would not harm the company in terms
of bankruptcy costs and should be considered.
The
typical
projects
of
the
firm,
like
airline
expansion
or
the
operating
business
at
the
hubs,
are
predictable
and
involve
funds
Agency
costs
that
can
be
easily
monitored.
This
leads
to
the
conclusion
that
agency
cost
due
to
a
clash
of
interest
are
unlikely
to
happen
and
thus
do
not
misfortune
additional
debt.
Singapore Airlines is a mature company with a cash balance of
4883,9 million SGD in the last financial year, thus it is well
positioned to finance its predictable projects. Also it has
presently very little debt outstanding and still does not seem to
struggle to finance its many current projects. Therefore it could
be predicted that also in the future the company does depend on
Future Financing
flexibility on high funds to finance prospective projects. Also the
Flexibility
company is well prepared by hedging contracts against any
unexpected increasing risks. Nevertheless competition (explained
in detail in the risk profile) is rising and the company might have
to change or expand its business strategy to low-‐cost services.
This could require high-‐unforeseen investments. The company
should investigate this aspect before adding debt. Yet SIA’s
reliance on future finance flexibility is quite low.
35
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Chapter
8
Optimal
Debt
Ratio
(Calculations
are
attached
in
the
Excel
File)
In
order
to
estimate
the
optimum
capital
structure
of
Singapore
Airlines
Ltd.,
the
Cost
of
Capital
Approach
was
used.
Due
to
the
fact
that
the
company
displays
certain
financial
figures
not
fitting
the
model
and
thus
not
leading
to
valuable
results
to
interpret,
some
assumptions
and
limitations
were
made.
As
the
airline
company
has
a
very
low
EBIT
(259,3
million
SGD)
in
comparison
to
the
high
operating
lease
commitments,
the
model
adjust
the
EBIT
was
not
taken
into
consideration
since
it
lead
to
a
negative
adjusted
EBIT
of
-‐69
million
SGD.A
negative
EBIT
would
have
especially
disturbed
the
ratings
of
the
debt,
therefore
the
already
low
recorded
EBIT
was
taken.
These
factors
are
also
reflected
in
the
choice
of
the
market
value
of
debt.
In
order
to
proceed
and
to
be
able
to
compare
the
optimal
to
SIA’s
current
ratio
the
same
market
value
of
debt
(see
WACC
calculations)
of
918,1million
SGD
was
taken.
In
addition
it
was
assumed,
that
Singapore
Airlines
will
have
a
corporate
tax
rate
of
17%
in
the
future
as
in
contrast
to
its
current
average
tax
rate
of
0%
connected
to
tax-‐loss-‐carry
forward.
Cost%of%Capital%Calculations D/D+E D/E Beta Cost%of%Equity
0% 0,00% 0,91 7,59%
Quote 11,6 10% 11,11% 0,99 8,08%
Shares%outstanding 1168,24
Market%value%of%equity 13.552
20% 25,00% 1,10 8,68%
Adjusted%market%value%of%debt 918,1 30% 42,86% 1,23 9,45%
Total%capitalization 14.470 40% 66,67% 1,41 10,49%
D/D+E 6,34%
50% 100,00% 1,67 11,94%
Risk%free%rate 2,36%
Market%risk%premium 5,75% 60% 150,00% 2,04 14,11%
Beta 0,97 70% 233,33% 2,67 17,73%
Beta%(unlevered) 0,91
80% 400,00% 3,93 24,96%
Tax%rate 17%
Adjusted%EBIT 259,3 90% 900,00% 7,71 46,68%
D/D+E Debt Interest EBIT/I Rating Interest2rate Tax2rate Cost%of%debt%(after%tax)
0% 0 0 NM AAA 2,760% 17% 2,29%
10% 1.447 53 4,896 AD 3,660% 17% 3,04%
20% 2.894 372 0,697 CCC 12,860% 17% 10,67%
30% 4.341 558 0,464 CCC 12,860% 17% 10,67%
40% 5.788 744 0,348 CCC 12,860% 17% 10,67%
50% 7.235 930 0,279 CCC 12,860% 17% 10,67%
60% 8.682 1.247 0,208 D 14,360% 17% 11,92%
70% 10.129 1.455 0,178 D 14,360% 17% 11,92%
80% 11.576 1.662 0,156 D 14,360% 17% 11,92%
90% 13.023 1.870 0,139 D 14,360% 17% 11,92%
36
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
D/D+E Beta Cost,of,Equity Cost,of,debt,(after,tax) Cost,of,capital
0% 0,91 7,59% 2,29% 7,59%
10% 0,99 8,08% 3,04% 7,57%
20% 1,10 8,68% 10,67% 9,08%
30% 1,23 9,45% 10,67% 9,82%
40% 1,41 10,49% 10,67% 10,56%
50% 1,67 11,94% 10,67% 11,30%
60% 2,04 14,11% 11,92% 12,79%
70% 2,67 17,73% 11,92% 13,66%
80% 3,93 24,96% 11,92% 14,53%
90% 7,71 46,68% 11,92% 15,39%
According
the
cost
of
capital
approach,
which
considers
different
combinations
of
debt
and
equity
in
the
company’s
capital
structure,
Singapore
Airline’s
debt
should
eual
10%
in
order
to
reach
the
lowest
cost
of
capital
of
7,57%.
When
drawing
the
comparison
to
the
company’s
current
WACC
of
7,63%
and
a
present
debt
ratio
of
6,34%
their
good
performance
in
finding
the
most
efficient
mix
of
debt
and
equity
in
their
capital
structure
can
be
noticed.
This
might
be
connected
to
the
clear
defined
goal
of
SIA’s
directors
to
maintain
a
minimum
cost
of
capital.
Therefore
they
regularly
review
the
capital
structure
and
adjust
it
to
economic
conditions
following
the
company’s
gearing
debt
ratio
of
0.07.
Singapore
Airlines
could
slightly
increase
its
debt
to
accomplish
the
optimum
ratio
of
10
%
suggested
by
the
model
by
for
instance
repurchasing
some
of
its
issued
ordinary
shares
as
treasury
stock
or
by
paying
a
special
dividend
to
its
shareholder
base.
These
actions,
as
outlined
earlier
in
the
report,
have
already
occurred
in
the
last
months.
Singapore
Airlines’
management
therefore
seems
to
be
very
experienced
in
cautiously
monitoring
the
overall
business
and
ensuring
stability,
as
well
as
an
optimal
capital
structure.
37
Corporate
Finance
BIB
WS14/15
-‐
Prof.
Dr.
Ralf
Hafner
-‐
Company
Analysis
Singapore
Airlines
–
Sophia
Hägerich
s0545879
Sources
• Lectures from Corporate Finance class WS 14/15
• Bloomberg channel
• Singapore Airlines’ annual report 13714
• http://www.staralliance.com/en/about/organisation/
• http://www.singaporeair.com/en_UK/about-‐us/sia-‐history/sia-‐csr/
• http://markets.ft.com/research/Markets/Tearsheets/Forecasts?s=C6L:SES
• https://secure.sgs.gov.sg/fdanet/SgsBenchmarkIssuePrices.aspx
• http://markets.ft.com/research/Markets/Tearsheets/Summary?s=C6L%3ASES
• http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=singf
• http://rmi.nus.edu.sg/gcr/weekly/WCBMAY14MAY202013.pdf
• http://www.staralliance.com/de/about/airlines/singapore_airlines/
• https://dspace.lib.cranfield.ac.uk/bitstream/1826/924/4/airline_beta_values-‐2003.pdf
• http://www.investopedia.com/terms/d/derivative.aspd
• http://people.stern.nyu.edu/adamodar/pdfiles/cfprojs/airlines.pdf
• http://centreforaviation.com/analysis/singapore-‐airlines-‐is-‐falling-‐behind-‐cathay-‐pacific-‐as-‐
asias-‐network-‐airline-‐giants-‐diverge-‐125074
38
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