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Should Investors Consider Singapore Airlines Ltd As A Possible Investment Candidate Now?

Airlines have a notorious reputation as a poor industry for investors to earn returns from.

Billionaire investor Warren Buffett once said that “investors have poured their money into airlines and airline manufacturers for 100 years with terrible results.”

Some of the economic characteristics of airlines that can potentially lead to poor business results for them include low pricing power, the need for high capital expenditures, high fixed costs, and more. But, there have also been airlines that have been spectacular investments in recent times as my colleague Chong Ser Jing had pointed out previously.

With all the above in mind, let’s look at Singapore Airlines Ltd (SGX: C6L) – Singapore’s flagship carrier – and see whether or not it has the qualities for investors to consider it as a possible investment candidate.

A business perspective

Two important things I like to look at about a business is its return on invested capital (ROIC) and the sustainability of its profit.

I had recently calculated the ROIC of Singapore Airlines for its fiscal year ended 31 March 2015 (fiscal 2015) and the number came out to be just 4.1%. An average company will have a ROIC of around 12% and so as you can see, Singapore Airline’s business appears to be below average.

Elsewhere, Singapore Airline’s profit of $368 million for fiscal 2015 is much lower than the profit of S$1.31 billion that was seen a decade ago in fiscal 2005. For me, this is an indication of how Singapore Airlines may not have an ability to generate sustainable profits.

A valuation perspective

The simple price-to-book ratio, price-to-earnings ratio, and dividend yield metrics may not be the most accurate way to value a company. But they are still useful guidelines and so, I want to focus on them here.

At Singapore Airlines’ current share price of S$11.36, the three metrics are at 1.03, 21.4, and 1.9% (thanks to a dividend of S$0.22 per share for fiscal 2015), respectively.

Though Singapore Airlines’ price-to-book ratio of 1.03 looks reasonable, the price-to-earnings ratio is high at 21.4. Moreover, the airline’s dividend yield is not too attractive as well at just 1.9%.

A value-creation perspective

According to data from S&P Global Market Intelligence, Singapore Airlines’ shares have gained just 37% in total over the past 10 years after accounting for gains from reinvested dividends. Putting that into perspective, an investor who had invested S$10,000 into Singapore Airlines 10 years ago will have just S$13,700 today. That’s an annual return of merely 3.2%, which does not look good.

Foolish conclusion

To sum up what we’ve seen above about the history of Singapore Airlines, it has (1) a low ROIC, (2) a likely inability to generate sustainable profits, (3) valuation metrics that appear to be demanding, and (4) a poor track record in creating value of shareholders.

But, it should be noted that this study of the company’s history should not be taken as the final word on the firm’s investing merits – the company’s future prospects are important and should be considered too before any conclusions can be reached.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.