Singapore Air may land unusual net-debt spot

Bloomberg

A record plane-buying spree is poised to land Singapore Airlines Ltd. in an unfamiliar territory.
Southeast Asia’s biggest carrier is expected to turn to a net-debt position as early as 2018 — for the first time in 13 years — as the company borrows money and sells bonds to meet capital expenditure needs, analysts say.
Singapore Air, which has traditionally limited its debt load, would benefit from raising funds more cheaply through borrowings to improve return ratios and valuations, equity research firms including OCBC Investment Research and Crucial Perspective say. The airline, which has $53 billion of aircraft on order, expanded a medium-term noteprogram by two thirds to $5 billion in April and said it intends to “proactively” take on more debt in future.
“I think it’s good for shareholders,” said Desmond Soon, Asia head of investment management at Western Asset Management Co. A company that can borrow cheaply can have higher leverage, leading to an improved return on equity and thus better prospects for stockholders, Singapore-based Soon said.
The carrier’s five-year average return on equity — an indication of how efficient a company is at generating profits — is below that of Cathay Pacific Airways Ltd., according to data compiled by Bloomberg.
Singapore Air’s net debt may reach about S$660 million ($472 million) by the end of March 2018, according to a report by Eugene Chua at OCBC Investment Research on Feb. 9. That compares with net cash of about S$3.3 billion for the 12 months through March 2016, Bloomberg-compiled data show.
“Historically there has been lot of criticism Singapore Airlines’ balance sheet is lazy” because of its cash pile, said Corrine Png, chief executive officer of Crucial Perspective, a research firm focused on Asian transport equities. A “more efficient” capital structure will help its return on equity, which has been depressed because of the large cash balance, she said.
Singapore Air has the smallest debt-to-equity ratio among 11 major airlines on the MSCI Asia Pacific Index at 10.3 percent, compared with 126 percent for Cathay Pacific, data compiled by Bloomberg show.
Capital expenditure at Singapore Air will average $4.3 billion annually for the five years through March 2022, based on company figures in an investor presentation in November. The spending will peak in the 12 months beginning April 2018, the year Singapore Air intends to restart the world’s longest nonstop flight using an ultralong-range version of Airbus SE’s A350-900.
“Our capital expenditure will be rising as we take advantage of new growth opportunities to better position the SIA Group for the future,” Nick Ionides, a spokesman, said in an email. “These investments will be financed by cash flows generated from operations, as well as by proactively taking on more debt in the coming years.”
Singapore Air has 214 planes on order, including 39 long-range aircraft from Boeing Co. with a list price of $13.8 billion. Discounts are customary in the industry for large orders. The Singapore carrier is trading at 3.1 times of enterprise value to trailing 12-month earnings before interest, tax, depreciation, amortization and rent costs, compared with 8 times for Cathay Pacific, data compiled by Bloomberg show. A lower figure means investors value Singapore Air less than Cathay Pacific.

Singapore Airlines’ cost of equity is 6.2 percent, while its cost of debt is 2.6 percent, based on the latest available datacompiled by Bloomberg. That debt cost is low among Singapore-based corporations, whose average is about 10 percentage points higher, making it “prudent” for Singapore Air to acquire more debt, said Nirgunan Tiruchelvam, a director at Religare Capital Markets in the city-state.
“Debt is cheaper than equity,” Joshua Crabb, head of Asian equities at a unit of Old Mutual Plc, said from Hong Kong. Therefore “optimal gearing structures can add value,” benefiting shareholders, he said.
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