This post will come at a time where it’s of no further use to anyone because the deadline for selling the Rights Issue has come and gone but investors have until next Thursday, 28 May to decide whether they want to exercise the Rights and Mandatory Convertible Bonds (MCB).

In brief, the whole point of Singapore Airlines (SIA) Ltd. issuing a 3-for-2 Rights Issue, which gives existing shareholders the right to buy additional shares at a discount, as well as the MCB (295 Rights MCB for every 100 shares) is to raise a boatload of money in light of the COVID-19 situation which has all but brought aviation and its attendant industries to a stop.

The issues are designed to help SIA raise money but without the additional pressure on their liquidity since both issues (as well as the option for another issue of MCBs) aren’t obliged to pay out any cash out.

It’s a smart corporate move since the whole thing is backstopped by Temasek Holdings who is the largest single shareholder in SIA.

Question is: Is it a good deal for minority shareholders?

I was asked by a relative so I did some back-of-the-envelope assessment on the deal and this is what I think. I’ll look at the Rights Issue first followed by the MCBs.

The Rights Issue

Since this is a 3-for-2 Rights Issue, what this means is that if existing shareholders do not take up the offer, their positions will effectively be substantially diluted (40% of the pre-rights level)

So I took the Pre-Rights Issue share price and dropped it by 60%. From the price charts, you can see that on 22 April, SIA was closed at 6.06 while the next day it closed at 4.32 for a drop of slightly less than 30%.

I’m not sure why the market wasn’t fully pricing in the news of the Rights Issue but given the full dilution and assuming the pricing multiples stayed the same, then the price should have fallen to 2.42. Obviously, SIA’s share price hasn’t fallen to that level which means that the market is pricing in some optimism into SIA’s future post capital raising.

On 20 May, the Rights were selling for $0.45 and given that the Rights allows the Rights holder to buy SIA shares at $3.00 per share, then, assuming no transaction costs or arbitrage, a share of SIA should be worth $3.45. On 20 May, the shares were worth 3.57 (and they have increased to about $3.60 in the last few days)

This gives someone who bought the Rights a roughly 4% return if he/she exercises the Rights and if prices stay the same until 8 June when the newly issued shares start trading.

My personal take is that a projected return of about 4% is not worth the trouble given that SIA share price could also drop further.

The Mandatory Convertible Bonds (MCBs)

Now, this issue is somewhat of a different animal.

SIA has a right to call the MCB during it’s 10-year life and depending on when they call it, the return will vary from 4-6% p.a. The kicker is that if they don’t call it and let it mature, the MCB gets converted into shares at a price of $4.84 (at the current equity structure).

I think SIA pretty much has all the upside in this deal. If things look good and they have cash, they can call it early and pay a lower interest rate while if they need to conserve cash, they can always let it mature and dilute equity holders further. Also don’t forget that they’ve got themselves the option of raising more capital in another one of these MCB deals.

Although many investors may think highly of a 4-6% p.a. yield, I would hardly think of this as solid returns. Putting your money in a CPF SA or Retirement Account yields you pretty much the same (of course CPF could always lower interest rates but given that they haven’t despite the low interest rate environment of the past decade, you wonder if there are political constraints to this) but without the business risk involved.

In short

Putting more money in SIA at these terms seem like National Service . The dilution is real and the share price of SIA is not going back to levels like $8-10 with this current level of dilution. Using the EPS*, diluted by only the Rights Issue, of $0.231 and a multiple of 15x gives us a price of $3.47 which basically leads me to believe that the market has all but priced in any upside to SIA.

Also, this EPS is for the most recent year where SIA had 9 solid months and 3 shitty ones. Of the 3 shitty ones, only 1.5 (?) months of it was a complete shutdown on air travel.

The next quarter (Apr, May, Jun) will be positively worse in terms of earnings and even if air travel comes back, I doubt planes will be allowed to carry the sort of loads that they once used to unless there is a proven vaccine.