Singapore Airlines retail bond application starts from 20 March 2019, 9 am, to 26 March 2019, 12 pm. 

The purpose of this article is to give readers my quick thoughts/opinion on the pros and cons of SIA retail bonds 2019. 

1. What is it?

Based on SIA official website, this is the detail of the bonds. 

Simply put, SIA as an airline, needs to purchase new aircraft once every few years. Usually, this is done to make sure the fleet of aircraft they are using continue to operate efficiently. 

Instead of using their own cash to purchase, they can either raise more equity by issuing more shares or by taking on debt. In this case, they decide to take on debt, not from a bank, but from retail investors.

In return for funding SIA for their capital expenditures, the public bond investors are promised a fixed interest of 3.03% per year. 

2. The Pros of SIA Retail Bond 2019

SIA has great branding in the airline industry. 

It is relatively easy for any retail investors to take part. Because the minimum sum is not high at a multiple of $1,000.

It is also easy to apply as we can do it through ATMs of DBS/POSB, OCBC, and UOB. As well as through internet banking of the participating banks. We can even apply via mobile banking applications if we have a DBS account. 

The application fee is also relatively low at $2 per application.

Investors are paid two times a year, on 28 March and 28 September of each year until the maturity date of the bonds, 

Interest derived from the bonds is also exempted from tax in Singapore.

There is liquidity because the bonds can be bought and sold in the market once it is listed and quoted on the main board of SGX-ST starting 29 March 2019 9 AM.

3. The Cons of SIA Retail Bond 2019

3.03% as essentially SIA cost of debt for this retail bond excluding fees they paid to DBS for helping to issue this, While this may seem low, their return on equity over the past years is not encouraging.

Image source; SGX

SIA return on equity for FY 2015 is 3.069%, 6.536% for FY 2016, 3.322% for FY 2017 and 6.67% for FY 2018. Their Last Twelve Months ROE is at 2.897%.

ROE is a sign of a company’s profitability. While on average, their return on the investor’s equity is higher than the 3.03% of the cost of debt they promise to pay to bondholders, it doesn’t seem to be of a huge enough margin of safety in terms of its profitability. 

Image source; SGX

Imagine this: SIA earned below 3% in the last twelve months for both returns on capital and equity. And a whole 3.03% will be paid on a yearly basis to bondholders.

This is a simple analysis that highlights one fact: SIA is in need of money to buy new aircraft and they did not fund this capital expenditure through just from their retained earnings, they needed to raise more debt for it. 

Image source: SGX

That is despite the fact as you can see above, they already have over 20 times more debt than equity n FY2018 to capitalize their operations. And over 40 times based on the last twelve months.

Last but not least, The SIA retail bond 2019 is not rated. 

4. In Summary

In summary, while SIA has great branding and is a Singaporean pride, the airline industry is ruthless. With the rise of budget airlines and ease of price comparison, SIA has clearly suffered in terms of profitability as you can see from its low ROE and ROC return. And have been funding its operations primarily through debt for quite some time. A debt of equity above 50% to me is bad enough, 20 times, 40 times? It is not sustainable in my humble opinion.

The SIA retail bond 2019 is currently not for me based on the above points I have written down. But for many, it can be a way to diversify their holdings. Furthermore, the low minimum sum and ease of investment are other pros to it. Plus, I do not think SIA will go down like Hyflux, but when buying a retail bond, I believe it is also important to at least understand what is going on behind the company’s fundamentals.

Cheers!

Corrections

I have double checked with the SIA official latest SGX filings. SIA long term debt to equity ratio is at about 0.4 or 40% (in a good position in my opinion) instead of 40 times as the article stated earlier (that was derived from looking at the SGX stock screener).

Disclaimer:

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