SIA shares fall despite higher dividend and profit. Why the decline?

What happened?

I shared in our recent weekly market review that I will be looking out for Singapore Airlines’ (SIA) earnings this week.

After the record quarterly profit reported by DBS and OCBC, investors were also looking out for a robust set of results by SIA. 

After all, SIA had reported a record revenue in the nine months ending December, driven by the robust demand for air travel.

SIA reported a record net profit of S$2.7 billion for fiscal year 2024 ending March, an increase of 24% compared to the previous year.

With the record net profit, SIA has proposed a final dividend of 38 cents per share. 

Including an interim dividend of 10 cents per share, SIA’s total dividend for fiscal year 2024 will be 48 cents per share.

This will be an increase from the dividend per share of 38 cents in the previous year. 

Despite the record profit and higher dividend, SIA's share price declined as of 11am on 16 May.

This led to a question in the Beansprout community about what is driving the share price weakness despite the higher profit and dividend.

Let us dive deeper into SIA’s results to find out more about the company’s prospects. 

What you need to know about SIA’s earnings

SIA net profit for fiscal year 2024 rose 24% to a record S$2.7 billion, which is 3.3% above consensus estimates. 

This was on the back of a 7.0% increase in revenue to S$19.0 billion. Passenger revenue rose 17.3% while cargo revenue fell 41.2% over the previous year. 

FY24 net profit benefitted from higher interest income of S$632 million (FY23: S$413 million), higher gains from disposal of aircraft and spares (S$65 million), and writeback of impairment of aircraft (S$14 million). It also booked fuel hedging gain of S$391 million which might not recur.

However, 4Q24 net profit was 4.5% lower year-on-year. Operating profit declined 19.6% year-on-year to S$565 million, despite 5.7% higher revenue, due to a steep climb in operating costs by 10.3%. Operating margin fell to 11.8% in 4Q24 (FY24: 14.3%).

#1 - Passenger volume remained strong; cargo picked up in 4Q24

Passenger traffic rose 20.8% year-on-year to record 29,586 million in 4Q24, underpinned by strong demand boosted by a rebound in demand from North Asia.

Cargo volume rebounded in 4Q24 to grow at 25% year-on-year, due to more belly-hold capacity on passenger flights, demand from e-commerce segment, and the Red Sea conflict that saw some shifts from maritime cargos to air freight.

Advanced bookings as at Mar 24 stayed high at S$4.7 billion (Mar23: S$4.6 billion), indicating still strong underlying demand for travel.

#2 - Yields continued to normalise

Passenger yield, as measured by revenue per available seat-km (RASK), fell to 9.3 cents in 4Q24, compared with 9.9 cents in 3Q24 and in the previous year. 

RASK came under pressure due to more airlines restoring capacity. The airline industry’s ability to restore capacity has been held back by capacity constraints at the aircraft manufacturers. 

When these constraints are lifted, airlines would resume their fleet expansion programme, which will lift the competitive landscape. 

Still, revenue per available seat-km was higher than FY19’s 7.7 cents, as passenger load factor remained elevated at 86.3% in 4Q24.

Despite the strong rebound in volume, cargo yield decelerated at a faster pace to 32.7 cents/load ton-km in 4Q24, compared with 40.3 cents in 3Q24, though still marginally above pre-Covid’s level of 31.7 cents. 

#3 -  Mounting cost pressure

Operating costs rose 8.0%, led by staff costs (+16.2%) which account for 21.8% of total costs. Other passenger-related costs, such as inflight meals (+45.4%), and airport and handling costs also rose at more than 20%. These passenger cost increases outpaced the 19% increase in capacity.

On the other hand, fuel cost, which account for 33.6% of total costs, fell 8.2% in FY24, helped by 18.5% decline in fuel prices. This is despite higher fuel consumption from more capacity, and lower hedging gain.

#4 – SIA swings back to adjusted net cash position

SIA had an adjusted net cash of S$1.6 billion at end March, a reversal from net debt of S$3.2 billion at end Dec 23. 

Besides the strong operating cash flow and advance ticket sales, its capex spend of S$1.2 billion is behind its target of S$2.3 billion for this year. 

#5 – Redemption of mandatory convertible bonds

SIA announced the redemption of the remaining mandatory convertible bonds on 24 Jun 2024. 

The total outlay will be S$1.74 billion. 

Each bond will be redeemed at 12.6% premium above the principal amount. 

After the redemption, SIA’s book value is estimated to fall to S$14,593m, or S$4.91/share.

What would Beansprout do?

The higher dividend announced by SIA offers some reason for shareholders to cheer the latest earnings announcement.

Based on its share price of $6.81, the total dividend of 48 cents will translate to a dividend yield of  7.0%.

This may appear to be above the dividend yield offered by DBS, OCBC and the Straits Times Index. 

Find out how much dividends you would have received as a shareholder of Singapore Airlines Limited in the past 12 months with the calculator below.  

However, there are some signs in the latest earnings that may raise doubts as to whether the profit and dividends can be sustained in the coming year.

In particular, heightened cost pressures and falling yields may exert downward pressure on margins in the coming year.

At the same time, there may be more cash outlay for SIA with the redemption of the remaining mandatory convertible bonds.

This might be why most analysts have a more neutral view on SIA, with a consensus share price target of S$6.79 as of 15 May 2024.

Related links:

• SIA share price and analysis
• SIA dividend history and payment dates

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