SIA - A Great Bargain
With the recent freefall in commercial flight activity, airline stocks have plunged. SIA, a solid pillar among Singapore’s blue-chip stocks, has seen its stock price drop from a high of $9 to $6 in just a month. Today, we will analyse if it is worthy to buy some at its current low price.
Price-Book Ratio
It is the ratio of the price of each stock divided by the value of its net assets (total assets - total liabilities). The current ratio for SIA is 0.59. This means that for every SIA stock you hold, you are owning a dollar’s worth of its pure assets by paying only .59 cents. These assets range from planes and properties to engineering machineries. You are getting a share of the firm for less than what it is actually worth in terms of raw assets. Even before taking into account the potential future growth of the company, when a P/B > 1 implies investors expect the firm to acquire more assets and strip off liabilities, the firm at the current moment is already undervalued.
Steady Income Stream
Airline earnings have taken a toll during the Covid-19 period of border shutdowns. There is no guarantee to say a well-established firm such as SIA would rebound back from this crisis into normalcy, shrugging off the 96% flight cancellations and lost cashflow as a minor injury. But these are extraordinary times and all airlines are hit badly. A fairer gauge of its vitality would be to look at its long history of steady, positive earnings. SIA has seen it keep a firm grip on its earnings over the last decade. Positive, increasing earnings are a sign of a firm’s ability to command market share, stay lean and adapt to changing market conditions. It could be a testament of the firm’s ethos, management or its profitable business model, among many other factors but it shows the firm is doing something right, so far. No analysis of financial reports can ever predict how the firm will perform in the future or even tomorrow, but what it does show is the firm’s ability to manuever changing market conditions in the past.
Positive Dividends
Any firm with cashflow issues will turn towards cutting dividends to common shareholders as the first line of remedy. Dividend payments are the least consequential use of a firm’s cashflow. To be able to maintain consistent dividends to shareholders signal a margin of safety inherent in the amount of profit earned each year. SIA has paid out consistent dividends over the years. A general rule of thumb is to see if a firm has paid out consistent dividends over the past decade. SIA has stuck to this rule.
Management
Stable upper management, with a clear focus on succession planning are trademarks of a functional and mature firm. Reshuffles within the top brass of SIA are intentional, with a focus on grooming future succession, and not done to restate loyalties among top branch members. The CEO has also been at the helm for more than 10 years since 2010, demonstrating his leadership abilities and the ability of the firm to engage in long-term planning for the vitality of the firm well into the future.