Singapore Airlines Ltd (SGX: C6L) is widely regarded as one of the best airlines in the world. But its stock has not fared so well in recent times. As of now, its shares linger around its 52-week low price. With that in mind, investors can ask three simple questions as a first step in assessing whether the company makes a good investment.
1) Does the company have a resilient business model?
2) Is it in a healthy financial position?
3) Is its current valuation reasonable?
It is, however, important to note that these three questions are not the only things to look at when deciding whether an investment is good. There are other factors in play. Nevertheless the answers to these three questions will give us a good overview of the company and whether it is worth digging further.
A quick overview of the business
Singapore Airlines Ltd operates a few brands — Singapore Airlines, SilkAir, Scoot, as well as its cargo segment. It also has a 77.8% stake in SIA Engineering Company Ltd (SGX: S59). The group is in the midst of integrating its SilkAir fleet with its core airlines. Scoot is a low-cost carrier that has been expanding its fleet and destination options.
SIA Engineering provides a range of services, including airframe maintenance, fleet management, line maintenance and technical handling, among others.
Question 1: Does the company have a resilient business model?
On the question on resilience, we will look at the group’s historical track record. Below is a table showing the company’s revenue and earnings per share over the past five years:
Source: Author’s compilation of data from Morningstar
There are a few things to note from its financial performance over the last few years. One, the group has been able to sustain its revenue but with very minimal growth. Two, it has been able to generate a profit each year but its earnings per share has been erratic.
Airline businesses are affected by oil prices and the performance of the global economy. Due to the relatively large amount of fuel required per flight, higher oil prices can have a direct impact on an airline’s bottom line.
For instance, in the most recent quarter, there was a 154% increase in Singapore Airlines’ fuel expenditure due to higher oil prices. As a result, the group’s bottom line suffered, declining 52.3% on year.
Question 2: Is the company in a good financial position?
Singapore Airlines has just S$21 million in debt, with S$2.7 billion in cash. It, therefore, is in a healthy net cash position. Its cash flow from operations have also been positive over the past five years, generating S$2.6 billion in the last financial year.
Question 3: Is the current valuation reasonable?
At the time of writing, Singapore Airlines shares are going at S$9.62 per piece. This translates to a price-to-earnings ratio of 16.9 and a price-to-book ratio of 0.8. The price looks reasonable when you compare it with its five-year average price-to-earnings of 30.7 and price-to-book ratio of 0.9.
The Foolish bottom line
Singapore Airlines has a healthy financial position and its current valuation is lower than its five-year average. However, its business model is dependent on factors outside of its control. Although Scoot’s Scoot Business could be a source of growth, the overall airline business is dependent on oil prices and the performance of the global economy. This has resulted in inconsistent earnings over the past five years.
In its most recent quarter, its earnings again declined more than 50% year-on-year, illustrating how erratic its business can be. As a long-term investor, I rather look elsewhere for companies that have a more consistent earnings track record.
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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 Jeremy Chia doesn't owns shares in any companies mentioned.