Financial Analysis Singapore Airlines

Description of the company

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Singapore Airlines started its activities in 1972, when Malaysia-Singapore Airlines (MSA) split into the two entities (the other firm was Malaysian Airline System). The company operates its business all over the world and provides air transportation services (both passenger and cargo), training, engineering, and tour wholesale opportunities. The Chief Executive Officer of the company is Goh Choon Phong, who was appointed for this position in January, 2011. The headquarters of Singapore Airlines is situated in Airline House, 25 Airline Road, Singapore.

The Singapore Airlines Group comprises of more than 20 subsidiaries arranged to maintain various airline-related services provided by the group. The main subsidiaries of the group are SilkAir, Scoot, SIA Engineering Company, SIA Cargo, and Tradewinds Tours and Travel.

SilkAir and Scoot operate regional and low-cost flights for passengers. SIA Engineering Company provides maintenance, repair, and overhaul (MRO) services for more than 85 airlines on the international market. SIA Cargo strategy is focused on providing cargo services to any possible place in the world. Tradewinds is the tour-operating subsidiary of Singapore Airlines offering travel packages to a range of popular destinations.

The main shareholder of the group is the Singapore-based corporation Temasek Holdings (Private) Limited. Other significant investors include DBS Pte Ltd, Citibank, DBSN Services Pte Ltd, HSBC, United Overseas Bank, and BNP Paribas.

The company is listed on the Singapore Exchange Securities Trading Limited and presented as C6L:SI. The latest closing price of the companys common stock constituted 10.84 Singapore Dollar, and has been fluctuating between 10.06 and 11.35 over the past 52 weeks.

The development strategy of Singapore Airlines is based on the three pillars (Singapore Airlines, 2013). The company intends to maintain: 1. Service excellence; 2. Product leadership; and 3. Network connectivity. Thus, the groups strategy is customer-oriented and directed on enhancing customer experience by all available means. The company conducts Cabin Retrofit programs to provide high-class facilities for the transportation services. Besides, Singapore Airlines participates in a range of partnerships to leverage its business opportunities.

Main products and markets

The main services rendered by Singapore Airlines include:

Passenger air transportation;

Cargo air transportation;

Charter air transportation;

Airport terminal services and rent;

Pilot and other aircraft staff training;

Airplane facilities engineering;

Tour wholesaling.

The airplanes fleet of the company comprises of 102 modern, young (up to six years in exploitation), and fuel-efficient aircrafts.

Singapore Airlines operates in five continent-wide markets. They are as follows: Asia, South West Pacific, the Americas, Europe, and Africa. Due to its excellent service standards, the company is widely recognized and awarded by the international community. In March 2013, Singapore Airlines has been ranked number 31 among the Fortunes Top 50 Worlds Most Admired Companies.

The operating environment of the company imposes high serial fluctuations in the financial performance and critical dependence on some external factors. First of all, being an air transportation service provider, the company realizes seasonal fluctuations in profits due to the seasonal demand for the passenger flights. Secondly, the firm is highly dependent on the fuel prices, which constitute one of its main expenditures. And, finally, some external factors may occur, that will significantly influence the companys performance , but cannot be predicted or insured. For example, the eruption of Eyjafjallajokull volcano in Iceland disrupted all airlines transportations globally, and caused cancellation of a large number of flights in the European destination.

Summary of the annual financial reports

Singapore Airlines prepares its financial statements based on the Singapore Financial Reporting Standards and provisions of the Singapore Companies Act, Chapter 50 (Singapore Airlines, 2012). The annual financial reports for the last two years have been audited by the independent audit group, Ernst & Young LLP. The auditors believe that the companys financial statements provide fair representation of the financial position and operating results of the group.

Financial year of the company is ended on March 31. Issuance of the annual reports is authorized by the resolution of the Board of Directors. The main principle of the companys accounting policy is the preparation of the statements based on the historical cost evaluation. The reporting currency of the group is Singapore Dollar (SGD).

As the groups balance sheets structure differs from the standard presentation, we will need to perform some calculations in order to provide evidence that the total assets are equal to the shareholders equity plus the total liabilities.

The long-term assets include Property, Plant & Equipment, Intangible assets, Subsidiary Companies, Associated Companies, Joint Venture Companies, Long-Term Investments, Other Receivables, and Deferred Account. Summing all these accounts for the year ended March 31, 2012, we obtain 14,837.1 million SGD; for the year ended March 31, 2011, the long-term assets amount constitutes 14,765.3 million SGD.

In order to determine the amount of long-term liabilities, we need to deduct the total equity from the balance sheet result. Therefore, for the year ended March 31, 2012, the long-term liabilities constitute 1,018.5 million SGD (equal to the balance sheet result of 16778.0 million SGD less total equity of 13,187.4 million SGD). As for the year ended March 31, 2011, the long-term liabilities are equal to 1,079.2 million SGD.

Therefore, we have the following equations:

Total assets = Shareholders equity + Total liabilities;

Long-term assets + Current assets = Total equity + Long-term liabilities + Current liabilities;

As for the year ended March 31, 2011 we have:

14,765.3 million SGD + 9,779.2 million SGD =

14,502.8 million SGD + 1,079.2 million SGD + 6,232.3 million SGD

As for the year ended March 31, 2012 we obtain:

14,837.1 million SGD + 7,205.9 million SGD =

13,187.4 million SGD + 1,018.5 million SGD + 5,265.0 million SGD

We can see that the total assets have declined in the financial year 2012/11 by 10.19%, as compared to the financial year 2011/10 (from 24,544.5 million SGD to 22,043.0 million SGD). This occurred primarily due to the decrease in the companys total equity at the end of the year.

The volume of total revenues for the years 2012/11 and 2011/10 has remained almost unchanged and equaled to 14,857.8 million SGD and 14,524.8 million SGD, respectively. However, the total expenditures have grown considerably, resulting in the decline of operating profit by 77.51% (from 1,271.3 million SGD in year 2011/10 to only 285.9 million SGD in year 2012/11). The net profit for the year ended March 31, 2012 fell to 396.8 million SGD, which constitutes approximately one-third of the financial result for the previous year. This caused also a decline in the earnings per share from 0.914 SGD in the year 2011/10 to 0.283 SGD in the year 2012/11.

The most sizable deterioration can be noticed on the companys cash flow statements compared for two years. In the year ended 31 March, 2012, Singapore Airline obtained negative net change in cash flows amounting to 2,761.9 million SGD, while in the previous year the company had positive net cash flows equal to 3,002.8 million SGD. The cash flows from operating activities remained larger than the net profit of the group and constituted 1,702.8 million SGD, which is 48.17% less than the previous years volume.

Financial performance analysis

In the following, we will present several financial ratios describing the companys liquidity position, its solvency and cash flow adequacy, profitability, and market strength. The ratios are based on the companys data for the last financial year ended March 31, 2012 (year 2012/11), and the previous financial year ended March 31, 2011 (year 2011/10). Sources of the data are: Singapore Airlines Annual Report 2012/11 (89-99) and Singapore Airlines Annual Report 2011/10 (87-97). Financial data is presented in millions of Singapore Dollars. Ratios are given in times or percentages.

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Liquidity measures provide the evidence of the companys ability to meet its short-term payable obligations.

Working capital is equal to Current assets less Current liabilities:

Year

Current assets

Current Liabilities

Working capital

2012/11

7 205.9

5 265.0

1 940.9

2011/10

9 779.2

6 232.3

3 546.9

The change amounts to - 1 606.0 and is unfavorable for the company.

Current ratio is calculated as a ratio of Current assets to Current liabilities:

Year

Current assets

Current Liabilities

Current ratio

2012/11

7 205.9

5 265.0

1.37

2011/10

9 779.2

6 232.3

1.57

The change constitutes - 0.20 and is unfavorable for the company. Current ratio is not close to the normative 2.0, and its decline indicates that the company may have problems with paying out its obligations in due time in the nearest future, if the situation does not change positively.

Quick ratio is measured as the ratio of the sum of Cash, Short-Term Investments, and Receivables to Current Liabilities:

Year

Cash+Investments+Receivables

Current liabilities

Quick ratio

2012/11

6 682.6

5 265.0

1.27

2011/10

9 213.8

6 232.3

1.48

The change is equal to - 0.21 and is unfavorable. The normative quick ratio should be around 1.5. The falling quick ratio shows that the company will have to sell its other current assets in the nearest future and, possibly, under the market price, in order to cover its upcoming liabilities, if the trend remains negative.

The turnover ratio is a measure of frequency of the receivables collection cycle. It defines the efficiency of the companys credit policy.

Receivables turnover is defined by the relation of Net Sales to Average Accounts Receivable:

Year

Net sales

Average receivables

Receivables turnover

2012/11

14 857.8

1 368.3

10.86

2011/10

14 524.8

1 364.8

10.64

Days sales uncollected is the ratio of total number of Days in a year to Receivables turnover:

Year

Days in a year

Receivables turnover

Days of sales uncollected

2012/11

365

10.86

33.61

2011/10

365

10.64

34.30

The change is insignificant (equal to - 0.68) and is favorable for the company. The turnover ratio indicates that the company has rather efficient credit policy and collects trade receivables in about one months period.

Solvency ratios describe the companys financial strength and its dependence on the external financing sources.

Debt-to-equity ratio is defined as Total debt (liabilities) to Total equity:

Year

Total debt

Total equity

Debt-to-equity

2012/11

6 283.5

13 187.4

0.48

2011/10

7 311.5

14 502.8

0.50

The change is favorable (equal to - 0.03) but is insignificant for the company.

Debt-to-assets ratio is the sum of Total Debt (Liabilities) divided by the sum of Total Assets:

Year

Total debt

Total assets

Debt-to-assets

2012/11

6 283.5

22 043.0

0.29

2011/10

7 311.5

24 544.5

0.30

The ratio shows that nearly 1/3 of financing comes from the external debts. This is a positive evidence for the company and it indicates its strong solvency position.

The interest coverage indicator shows the ability of the company to generate income that is enough to cover its financial expenditures occurring from the external financing of the business.

Interest coverage is equal to Income Before Income Taxes and Interest (EBIT) over Interest charges. EBIT is calculated by adding Interest expense amount to the Pretax income.

Year

EBIT

Interest charges

Interest coverage

2012

522.5

74.3

7.03

2011

1 489.1

70.1

21.24

The interest coverage ratio has declined by almost three times. Although this change is obviously unfavorable for the company, its overall position remains rather strong. The company is able to pay out its interest expense approximately 7 times by using its generated net income.

Cash flow adequacy ratios describe the relation of the net cash flows generated from operating activities and the main financial figures, which participate in the operational activities (the companys revenues, assets, net income).

Cash flow yield indicates how much the Net Operating cash flow overweighs the Net Income:

Year

Net operating cash flow

Net income

Cash flow yield

2012/11

1 702.8

396.8

4.29

2011/10

3 285.2

1 148.8

2.86

Although the change is favorable and equals to 1.43, we need to take into consideration that both the companys net cash flow from operating activities and net income have fallen considerably in the last year, as compared to the previous one.

Cash flows to sales ratio is equal to the Net Operating cash flow to the Net Sales:

Year

Net operating cash flow

Net sales

Cash flows to sales

2012/11

1 702.8

14 857.8

11.46%

2011/10

3 285.2

14 524.8

22.62%

The change is unfavorable and equals to - 11.16%.

Cash flows to assets is the ratio of the Net Operating cash flow to the Average Total Assets:

Year

Net operating cash flow

Average total assets

Cash flows to assets

2012/11

1 702.8

23 293.8

7.31%

2011/10

3 285.2

23 514.4

13.97%

Both the cash flows to net sales and the cash flows to assets ratios declined almost twice over the past two years. This shows that the company has generated two times less cash flows from its ordinary operations in the year ended March 31, 2012, than in the year ended March 31, 2011, as compared to its available assets and revenues. Thus, it may have problems with available cash funds needed to maintain its everyday business.

Free cash flow is the volume of the companys Net Operating cash flow less Dividends and Net Capital Expenditures:

Year

Net operating cash flow

Dividends

Net capital expenditures

Free cash flow

2012/11

1 702.8

1 557.2

1 641.2

-1 495.60

2011/10

3 285.2

382.7

1 223.8

1 678.70

The company has negative free cash flow in the year 2012, which means that its operational cash inflows are not enough to cover the declared dividends and conducted capital expenditures. The companys management needs to review its dividends and investment policies considerably to ensure that the company has adequate cash outflows available from its operations.

Profitability ratios define the companys ability to generate profits and its attractiveness for the current and potential investors.

Profit margin is defined as the ratio of Net Income to Total Revenues. It shows how profitable the sales of the company are.

Year

Net income

Net sales

Profit margin

2012/11

396.8

14 857.8

2.67%

2011/10

1 148.8

14 524.8

7.91%

The change equals to -5.24% (almost by three times) and is unfavorable for the company. We can see that despite the growth in the sales volume, the company has lost considerably in the amount of resulting net profits for the year ended March 31, 2012.

Asset turnover is the ratio of Net Sales to Average Total Assest:

Year

Net sales

Average total assets

Asset turnover

2012/11

14 857.8

23 293.8

0.64

2011/10

14 524.8

23 514.4

0.62

Asset turnover indicator has not changed considerably, as the company had no significant change either in sales revenues or in the volume of total assets over the past two years.

Return on assets (ROA) is calculated as a ratio of Net Income to Average Total Assets:

Year

Net income

Average total assets

ROA

2012/11

396.8

23 293.8

1.70%

2011/10

1 148.8

23 514.4

4.89%

Return on equity (ROE) is the ratio of Net Income to Average Shareholders Equity:

Year

Net income

Average shareholders' equity

ROE

2012/11

396.8

13 845.1

2.87%

2011/10

1 148.8

14 126.1

8.13%

Both ratios to the net income of the company (ROA and ROE) have declined by almost four times in the year 2012, as compared to 2011. Moreover, these ratios are rather small, as compared to the average industry indicators. This provides the evidence of very poor profitability of the company. Further decline in the net income could result in negative figures of the companys performance and impose losses for its investors.

The main market strength ratios are P/E (price to earnings) ratio, dividends yield, and dividends payout ratio. These ratios reflect the companys attractiveness on the stock market and the evaluation of the companys assets by investors.

Price to earnings per share is the ratio of Market Price per Share to the Earnings Per Share (EPS):

Year

Market price per share

EPS

Price to earnings

2012/11

10.77

0.28

38.06

2011/10

13.68

0.91

14.97

The change in the P/E ratio shows that the stock price has fallen down less than the EPS of the company. This indicates that the market (investors) might be overestimating the companys performance or relying on its reputation more than on the current financial performance.

Dividends yield is equal to Dividends Per Share over the Market Proce Per Share:

Year

Dividends per share

Market price per share

Dividends yield

2012/11

0.20

10.77

1.86%

2011/10

0.60

13.68

4.39%

The ratio shows that the direct yield obtained by investors from the companys stock through dividends has declined considerably in the last year.

Dividend payout ratio is determined as the proportion of Annual Cash Dividends Per Share to Earnings Per Share (EPS):

Year

Dividends per share

EPS

Dividends payout

2012/11

0.20

0.28

70.67%

2011/10

0.60

0.91

65.65%

Despite the decrease in net profits and earnings per share, the company pays out higher proportion of dividends in the year 2012 than in the 2011. This policy might not be an adequate one, and could be approved only as a way to keep the companys current investors. Besides, this has affected the companys net cash flows for the year 2012, which resulted in the negative figures.

Conclusions on the investment attractiveness

Investing in Singapore Airlines does not seem to be a very attractive option. The company has had declining profitability and market strength ratios over the past two years. As the company net income has fallen down by three times in the year ended March 31, 2012, as compared to the year ended March 31, 2011, while its sales revenues remained relatively unchanged, we can indicate that the companys cost efficiency policy needs to be revised as soon as possible. First of all, the company needs to consider its hedging policies, as its expenditures are highly dependent on the prices on fuel. Without a critical change in the companys performance, an ordinary investor is not expected to obtain significant profits from the Singapore Airlines (C6L:SI) stocks.

The current situation of the company has improved only slightly. According to the Bloomberg analytics, the estimated earnings per share for the financial year ended March 31, 2013, will be equal to 0.2320 SGD. At the same time, statistics shows that annual dividends have decline by 32.13% over the last five years. This evidence does not allow considering the company as an attractive investment opportunity.

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