Unexpectedly, SIA is redeeming the 2020 MCBs early!

Readers of my posts would know my opinion that the MCBs were a significant liability for SIA minority shareholders, because conversion in 2030/2031 would result in massive dilution of SIA stock. I had also expressed deep scepticism that SIA would be able to redeem the MCBs early (i.e. avoid a conversion event) and was surprised at how bullish DBS equity analysts were when they released a research report on SIA in May 2022.

Well, turns out that I am very likely to be wrong. SIA announced on 25 Oct 2022 that it would redeem the MCBs issued in 2020, to the tune of $3.86b. [BT link] The 2020 tranche was issued at $3.5b. There's also talk that SIA would likely redeem the 2021 tranche (issued at $6.2b), earlier than the 2031 conversion date - doing so would mean that the 2030/2031 dilution event is averted, and there is also potential for SIA to resume paying dividends to shareholders.

Some reflections on why my prediction was off:

1) I was focused primarily on net income. I estimated that SIA wouldn't be able to generate a cumulative $10b of profits by end of FY2030/31.

2) In doing so, I failed to consider the important fact that SIA had built up a sizeable warchest of cash and equivalents, arising from the various cash-raising exercises that it executed in 2020 and 2021. To put this in perspective, SIA had around $16b in cash and bank balances as at 30 June 2022. Pre-Covid, it looks as though the Group had around $3b in the same, although I am not sure if this is directly comparable as SIA appears to have changed its financial report format beginning in FY2020/21.

So in focusing my analysis just on net income alone, I didn't pay heed to the possibility that SIA could pay off the MCBs from its much-enlarged cash assets. Net of the $3.86b required for the committed redemption of the 2020 MCBs, SIA would still have around $12b in cash and equivalents.

With a boost in air travel from travel resumption helping to prop up SIA's quarterly profit, it now looks quite likely that SIA will be able to redeem the 2021 MCB tranches (around ~$7b including accrued interest) soon. This might happen sometime in 2H 2023 or possibly 1Q 2024.

Why I've switched to using CPF OA to pay for my property loan

Previously, I was paying the monthly mortgage on my housing loan using cash. With the change in the interest rate environment, doing so no longer makes sense, and here's why I'll be switching to CPF OA to make the monthly payment going forward.

Exploring SGS T-bills

The recent hike in global interest rates led me to become interested in a type of financial instrument that I had never previously explored in-depth: Singapore Government Securities (SGS) T-bills.

If you are like me and largely unfamiliar with T-bills, you can either refer to MAS's informative site for individual investors [link], or refer to my summary:

• $1000 minimum investment amount
• Tenure of 1-year, 6-months, or 3-months
• Issued at discount to par
• Yield determined via auction. Competitive bids determine the cut-off yield, non-competitive bids  take the cut-off yield 
• AAA-rated

For the most recent issue of 6M T-bills (issue date 12 July 2022), the yield was 2.66% p.a. This makes T-bills a very compelling alternative to Fixed Deposits (FDs) that are issued by banks. In fact, the yield is much higher than the banks' FD rates (for 6M, smallest amount) as of time of writing, which are:

• DBS: 0.75% p.a.
• OCBC: 0.10% p.a.
• UOB: 0.05% p.a.
• (* Seeing how there is a 70 bp difference just between DBS and UOB, I would take these 'published' rates with a large pinch of salt. Note that there are often 'promotional' FD rates with certain conditions, e.g. UOB is offering 1.4% p.a. for 10M FD with minimum amount of $20k)

The latest 6M and 1Y T-bills are open for application from 14 July 2022. Their respective auctions will take place on 21 July 2022, and the T-bills will be issued on 26 July 2022. This is my first time applying for T-bills, and I plan to:

• Apply for some 6M T-bills via non-competitive bid. If allotted, I will get whatever cut-off yield that is determined through the auction. Given interest rate trends, I expect this to be equal to or better than 2.66% p.a. Based on the results of the most recent issuance, 100% of non-competitive bids received an allotment, and I expect a similar high rate of allotment for non-competitive bids this time round. 
• Apply for some 1Y T-bills via competitive bid. I will only receive an allotment if the cut-off yield (determined via auction) is equal to or better than my bid yield. For example, if I bid 3.25% but the cut-off is 3.05%, I will receive zero T-bills. The allotment rate for competitive bids is not as high as that for non-competitive bids, so I may end up with a partial allotment even if the first condition is met. I have not yet decided what I will bid, but I'll likely aim for something in the region of 3% p.a. or higher. [edit: Closely watching the YTMs of past issues of SGS Bonds, especially the one expiring in July 2023. At time of writing, the MAS SGS Bond Calculator indicates around 2.79% p.a. YTM so that should roughly correspond to the cut-off yield for the upcoming 1Y T-bill issue.]

How are T-bills different compared to Singapore Savings Bonds (SSB)

SSBs are probably slightly better understood among the general Singapore population. Every month, a new tranche of SSBs is issued, with a schedule of rates for the next 10 years. Key differences:

• Tenure: SSBs have flexible tenure, in that the holder can sell them at any time within the 10 year period, and receive pro-rated interest up to the point of sale. In comparison, T-bills are more like  fixed deposits.
• How the holder attains yield: SSBs distributes interest in the form of coupon payments every 6 months to SSB holders. T-bills are issued at discount to par, so the T-bill holder only realizes the yield at the end of the tenure period.
• Allotment: For recent issues of SSBs, there has been oversubscription and hence many receive partial allotments only. For T-bills, it appears that non-competitive bids have a fairly high chance of full allotment, based on recent trends.

The oversubscription for SSBs has become a something of a problem - if you actually want to buy $50k of SSBs, but end up only getting a $20k allotment, you then have to figure out what to do with the remaining $30k. If you let it sit in the bank, it gets eroded by inflation.

Hence I am keen to try out a non-competitive bid for the 6M T-bill, essentially guaranteeing full allotment (but I do not have a direct say in the yield), whereas for the 1Y T-bill, I'm considering a competitive bid since I would prefer that it clears the 3% hurdle. [edit: See edit above; unlikely to surpass 3% p.a.]

The Unique Way CPF Computes Interest: Find out when is the best time to make a CPF Investment

Back in 2018, I learned that CPF computes its interest using a method different from that of typical bank accounts, and shared this information as a footnote to a post then. In a nutshell:

• Bank account computes interest on a daily basis, and then pays you interest monthly (i.e. monthly compounding).
• CPF computes interest on a monthly basis, and then pays you interest annual (i.e. annual compounding).
  
• For the exact same amount, you will get slightly more interest when using monthly compounding as compared to annual compounding.

The CPF Board also explains this in layperson-friendly language on its website:

Source: CPF website, retrieved 28 June 2022.

Based on this, I have been under the impression that the monthly interest is computed in this manner:

A post I came across at Fatty's Finance also interprets likewise:  

via Fatty's Finance

Interest is calculated on the "lowest amount in the month" - sounds correct, and matches with the wording from the CPF website, at least from a layperson's reading of the latter.

After doing my own checks, I believe that this interpretation, as well as my diagram above, is not precisely correct.

Unpacking DBS research analysts' bullish view on SIA

(Initially, I had planned to spend some time jotting down some thoughts about how cooling measures, specifically ABSD, might have the unintended consequence of actually increasing property prices, but I shall KIV that for a later post.)

Given the assessments I had made about SIA in prior posts here, I had made a mental note to keep an eye on SIA's FY21/22 financial results, which are due to be announced tomorrow, 18 May 2022. Late this evening, I came across Business Times coverage (link, paywalled) of an analyst report (pdf link) by DBS research, giving a BUY call on the airline. I was intrigued for two reasons:

1. Timing: By no means I track research reports regularly. However, it is uncommon for research reports to be published by analysts one day before a company's FY earnings announcement. Typically, analysts try to take into consideration the latest guidance/outlook as well as financial figures, so it struck me as very odd that the DBS equity research team decided to squeeze out its company update for SIA a day prior to the airline's earnings announcement. 
   
   
2. Thesis: Readers of my previous posts would be aware of my view that the MCBs loom over SIA minority shareholders and present a significant dilution threat. In addition to being extremely bullish on SIA, DBS research also states that they "treat the MCBs as debt instead of equity, as [they] see SIA redeeming the MCBs within 10 years, and deduct the accrued interest at end-FY23/24F." This runs entirely counter to my views and made me wonder if I was missing something. 

I felt a need to jot down my thoughts in response. Here goes:

Strange Risk Assessment by DBS Analysts

The analyst report is exceptionally bullish - with "street-high earnings estimates" and valuation based on a P/BV that's 1.5 std devs above the stock's 10-year mean P/BV. I have no qualms with these, since that is their view. But look at the following paragraph (extracted from p1):

Huh, how can this be a risk? Are the DBS analysts saying that the risk to their (bullish) view is that they might not be bullish enough? Cos that's what the paragraph says. Pretty darn weird. One would expect an assessment of risks to be something like: "recession may dampen travel demand" or "new Covid variants may lead to dialling back of reopening" or "airline runs into manpower issues and unable to hire and re-train quickly enough", but no, we have the above paragraph that presents a strange, almost absurd assessment of the risks of the report team's stated view. 

Unclear how redemption of MCBs can be funded

Granted, any redemption is likely to occur closer to the conversion date of the MCBs, i.e. around 2030/2031, and this is beyond the time-frame of the report. Still, based on the analysts' FY2022/23 and FY2023/24 forecasts (net profit estimated to be $500 mil and $1 bil respectively), I believe that SIA won't be able to generate the $10 bil necessary to redeem the MCBs early, at least not from accumulated earnings between now and 2030/2031.

SIA minority shareholders should be aware that SIA is carrying the $9.7 bil of MCBs on its balance sheet as equity rather than as debt - see 1H-FY21/22 update, p4 of 37. Key implications of doing so:

• By accounting for the MCBs as equity, SIA presents more favourable ratios and financials, such as lower Debt/Assets, Debt/Equity, etc. This is likely advantageous for SIA when it seeks to raise capital, e.g. taking on more debt.  
• By accounting for the MCBs as equity, SIA ought to present key statistics, such as EPS and NAV per share, on basic as well as adjusted basis. [adjusted = assuming MCBs ultimately get converted to shares] Interestingly, SIA did not do so for the 1H-FY21/22 update (see p32) but subsequently reported both basic and adjusted figures in the 3Q-FY21/22 update (see p8 of 10). NAV per share at end-Dec 2021 was $7.45, while just $3.35 on the adjusted basis. The latter makes clear the immense dilutive effect on NAV if the MCBs were held till their mandatory conversion date. 

Notably, DBS analysts treat the MCBs as debt instead of equity, in line with their assumption that the MCBs will be redeemed rather than converted. SIA minority shareholders should pay close attention to valuations and forecasts. From what I can tell (see balance sheet on p8 of analyst report), the DBS analysts adopt SIA's accounting of the MCBs, i.e. carried on balance sheet as equity, even though they say that they treat the MCBs as debt instead of equity. 

I'll give the analysts benefit of doubt that this wasn't an oversight, after all, the redemption (if it happens) is almost certainly to be beyond 2024F. Shareholders should just bear in mind that, regardless whether carried as equity or debt, if the MCBs are to be redeemed prior to the mandatory conversion date, the cardinal accounting equation [Assets = Debt + Shareholders' Equity] still applies. So to wipe the $9.7b of Equity off the balance sheet, SIA will either need to wipe $9.7b off the Assets side of the equation, or pile on $9.7b more in Debt (or a mix of both). The DBS analysts have not shared any views as to how the MCBs will be redeemed, and it is my view that SIA will face a Herculean task in finding a lender willing to extend close to $10b of Debt to the airline for this purpose.

Dividends?? Really?!

The DBS analysts assume that SIA will resume paying a dividend as early as 2023F, with 5.06 cents DPS in 2023F and 10.8 cents DPS in 2024F. (see Forecasts and Valuation table on p1 of analyst report. Separately, note that on p8, the $150 mil expenditure in 2024F for dividends paid would refer to the 5.06 cents DPS paid on ~3 billion issued shares for the prior period 2023F)

I cannot agree with this assessment that dividend payouts will resume, since I believe it would be in SIA's interest to conserve cash if it intends to redeem the MCBs early. Resuming dividends payout simply does not gel with the analysts' view that SIA will redeem the MCBs early. 

===

Overall, I find the DBS research report almost laughably bullish. Of course, DBS and SIA are both under the big T umbrella and in fact have the same Chairman of their respective Boards, so perhaps there's much that I don't know. In any case, it seems that the DBS analysts are more bearish than me for the current FY, estimating an operating loss of $516 mil, as compared to my own latest revised estimate of operating loss between $350-$400 mil. We'll find out tomorrow when SIA releases its full-year results.

In the meantime, I can only hope that SIA minority shareholders are paying close attention to the actual numbers, and not just let themselves be buoyed by bullish media coverage.

===

UPDATE: 19/5/2022

Singapore Airlines released their full-year FY2021/22 earnings yesterday. Actual net loss of $962 mil compared to DBS analyst estimate of $811 mil (loss). Operating loss of $610 mil was greater than DBS analyst estimates of $516 mil as well as my own revised estimates above.

Not surprisingly, the stock price today gave up pretty much all of the boost that the bullish DBS report provided just a day before, as seen annotated below. The timing (and slant) of the analyst report is questionable.

Resumption of travel: What beckons for Singapore Airlines?

[Disclosure: As at time of writing, I do not currently hold any position in SIA, and have no intention to establish a position in the same. I do, however, hold a position in SIA Engineering Company (SIAEC), which is a majority-owned subsidiary of SIA.]

With Singapore announcing reopening of borders with minimal restrictions for vaccinated travellers starting 31 Mar 2022, things are finally looking meaningfully better for travel, including air travel and SIA.

An article in ST on 1 April 2022 discussing SIA, SIAEC and SATS [link; subscription required] compelled me to dust off my thinking cap/analytical lenses, to revisit my previous views regarding holding SIA stock. I last wrote about SIA in May 2021 [link], building on two earlier posts from May 2020 [1] [2].

Rocky Start to 2022

Although 2021 was set to look like a continuation of the positive momentum of 2020 that was driven largely by tech stocks, volatility that emerged around December 2021 and continued through January 2022 has eroded a significant amount of those gains.

I am reminded of my end-2018 post, where I reflected on that year and remarked about how I had ended up pretty much where I had begun. A few years on, with a few clicks on Interactive Broker's fantastic PortfolioAnalyst tool, I was able to generate a couple of reports that contained interesting and informative findings on my holdings under IB.*See footnote.

The risk measures section in the report is something I've paid scant attention to. The entire notion didn't even exist back when I was still using the platforms offered by other brokers in Singapore, because those platforms simply didn't let investors generate any sort of meaningful reports beyond the typical monthly account statement. I'm guessing there will probably be some geek who is still with one of those brokers and has taken it upon him/herself to track their investments separately in some spreadsheet in order to compute these statistics, but I neither have the time nor energy to do so. (In any case, IB offers lower fees than the majority of its competitors, and the competitors' platforms are crappier. So it doesn't really make sense to stick with those competitors, although it appears that a lot of people do, whether due to inertia or simple irrationality, I do not know. Disclaimer: I do have SGX holdings with SCB online trading, so I am occasionally compelled to endure using their platform, but I've been actively seeking alternatives.)

Anyway I digress. IB provided me the risk analysis for 2018:
(to decode: VT is Vanguard Total World; EWS is iShares MSCI Singapore ETF, which I use as an inaccurate proxy for STI; SPX is the S&P 500; and Robust is the alias of my portfolio with IB.)

Risk Measures for 2018

A few more clicks and I got the comparable data for 2020:

Risk Measures for 2020

And finally, I generated the same metrics for the time period since I setup my IB account and started using it, until the most recently available date (3 Feb 2022):

Risk Measures since Inception till Feb 2022

Some observations:

• In 2018, Robust's Max Drawdown was 23.04%. This is almost comparable to the ongoing  decline associated with the recent market volatility: we're looking at Max Drawdown of 22.45% from Robust's peak in early Nov 2021 until its recent trough on 27 Jan 2022. And there's no indication that we are at the market bottom, so there may be more pain in the coming weeks or months. 
• Consider this: Robust's Max Drawdown in 2020 was 30.12% - this was at the onset of Covid outbreak all around the world. If the current bearish market sentiment can't be shaken off, then Robust might approach a drawdown magnitude close to that of the onset of Covid - certainly a worrying thought, but more importantly it's a useful statistic that helps to put things in perspective.
• In terms of Sharpe and Sortino ratios, Robust has outperformed both VT and SPX indices. (Although the EWS index is shown, it isn't a fair comparison since I believe EWS distributes rather than accumulates dividends, and so would be undervalued in all the charts and measures. #See footnote) 2020 was a stellar year with Sharpe ratio above 1, although overall the Sharpe Ratio for Robust since inception remains below 1, at 0.88. I hope to improve this over time. [Sidenote: In calculating downside deviation and Sortino Ratios, IB uses the historical annual return of the S&P 500 since inception, including dividends. This is why the Sortino Ratio for SPX is close to 1 for the Aug 2017-Feb 2022 period.]
• Mean Return for Robust for the full time period is 0.08% daily. This means that if I had $1 million (I don't) in Robust, it would theoretically have generated an average return of $800 every day for the time period. This is a thought experiment more than anything, since there are periods where the portfolio as a whole has declined by 20% or more (see first and second bullet points) but its quite a provoking finding nonetheless.
• Comparing the drawdowns and subsequent recoveries in 2020, the tech-heavy weightage of Robust is evident from its relatively quick recovery of 57 days, compared to the slower recovers of the more diversified indices of SPX (106 days) and VT (110 days). This was because tech stocks benefited immensely from remote working and other Covid restrictions. For the current drawdown, I do not expect Robust to outpace SPX and/or VT in recovery, because the tables have been turned and it is precisely the sector to which Robust is overweight (tech) that has led the recent declines.

*It is truly a travesty that the incumbent brokers in Singapore offer investors no way to generate such reports. This is due to one of two main reasons: 1) the use of individual CDP accounts means that a broker cannot have an accurate picture of its client's holdings at any particular point in time - and by extension, over any particular time period - and hence cannot track returns nor risk measures of a client's portfolio; 2) there is generally a lack of cutting-edge features in investment platforms offered by the incumbents in SG, and most appear comfortable to hobble along with idiosyncratic, feature-thin, and perplexing client-facing products.

# Some info is available on the iShares website https://www.ishares.com/us/products/239678/ishares-msci-singapore-capped-etf#chartDialog that allows for comparison. Using the Aug 2017 to Feb 2022 time period, $10,000 in EWS, with distributions reinvested, would have ended up at $10,492.70. Strangely, the IB captures the EWS return for the same time period as 5.04%, i.e. $10,000 would have ended up at $10,504. Perhaps I'm mistaken, and EWS data reflected in IB reports assumes that distributions are reinvested rather than paid out. But the tl;dr remains the same, performance of Singapore-listed equities has been rather paltry in the last 5 years. Using the iShares site and extending the time horizon to 10 years, the annualised returns for EWS works out to be around 2.3% - notably, this is lousier than returns offered under the CPF Ordinary Account!