Published May 15, 2009

SATS bonanza for SIA shareholders

Airline divests stake in subsidiary and will distribute it among its shareholders while conserving cash

By VEN SREENIVASAN

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(SINGAPORE) Singapore Airlines is divesting its 81 per cent stake in listed airport and ground services subsidiary Singapore Airport Terminal Services (SATS).

The proposed distribution will allow Singapore Airlines to concentrate on its airline and aircraft maintenance, repair and overhaul businesses.

In an announcement made late yesterday, the airline said it would divest its SATS stake via an in specie distribution whereby SIA shareholders will receive up to 730 SATS shares for every 1,000 SIA shares held.

SIA closed 52 cents down at $11.60 yesterday on a volume of 2.05 billion, while SATS slipped two cents to $1.55 on 551,000 shares traded.

Based on SATS' closing price yesterday, the 81 per cent stake that SIA is distributing is worth $1.34 billion.

'Distributing shares through an in specie dividend will unlock shareholder value by giving SIA shareholders direct ownership of SATS at no cost to them,' the airline said in a statement. 'The proposed distribution will allow Singapore Airlines to concentrate on its airline and aircraft maintenance, repair and overhaul businesses.'

While offering its shareholders SATS stock, SIA has cut back on the cash dividend compared to last year.

Based on yesterday's prices, each SIA share will get the holder $1.13 worth of SATS stock. The airline is also paying a total dividend of 40 cents per share for the year - compared to $1 last year. This means that while shareholders get a bigger potential payout this year, SIA ends up paying less cash.

SIA added that the proposed distribution - which has to be approved by shareholders, including parent Temasek Holdings, at an EGM - would not have any impact on its financial position. It has appointed DBS Bank as its financial adviser for the proposed distribution.

Related links: Click here for SIA's news release Audited financial results

Given that SIA's board and its CEO Chew Choon Seng had previously said that the airline was not keen to divest either of its subsidiaries, the divestment must come as a surprise to many market watchers. 'I am a bit perplexed, and perhaps a bit disappointed,' said S&P Asian Equities Research analyst Vincent Ng. 'I can't see a sound rationale at this point, but let's wait for their explanation.'

The move comes just months after SATS' $509 million acquisition in Singapore Food Industries (SFI) in a bid to diversify away from the aviation business.

The divestment will see SIA and SATS becoming sister companies under a single parent - Temasek Holdings, which currently owns about 55 per cent of SIA.

Market insiders see this as a potential boost for SIA, given that it will retain much of its cash, while divesting a business which has been under cost pressure in recent years.

'The price of SIA stock, which has been short-sold severely in recent weeks, should pick up,' said one institutional broker.

Besides announcing the divestment, Asia's most profitable airline also announced yesterday that it made a net profit of $42 million in its January-March fourth quarter, down from the $486 million it made in the same period last year.

This was thanks to a $138 million deferred tax write-back, and contributions from its subsidiaries SATS and SIA Engineering.

At the operating level, SIA was in the red to the tune of $28 million as it incurred a fuel hedging loss of $543 million. The airline is hedged at an average of some US$112 per barrel versus the US$65 pbl spot fuel price. Still, SIA's fuel bill fell some $666 million during the quarter.

Topline revenue fell 19.1 per cent or a whopping $786 million to $3,321 million during the final quarter, as the decline in passenger and cargo carriage accelerated in the fourth quarter.

For the full year ended March 31, SIA posted net earnings of $1.062 billion, some 48 per cent or $988 million down from the previous year's $2.049 billion.

But without a one-off deferred tax write-back of $138 million, group operating profit would have fallen 58 per cent to $904 million (the parent airline's operating profit was $823 million, down from $1.644 billion a year earlier).

Turnover was stable at $15.996 billion, compared to $15.972 billion.

SIA Cargo sank further into the red to the tune of $245 million at the operating level during the year (from $132 million in the previous year), while SilkAir's operating profit fell 16 per cent to $34 million.

SIA shareholders will also get a final dividend of 20 cents per share. It paid 20 cents per share at mid-time.

The company came into the new financial year with net cash of some $3.8 billion, compared to $5.1 billion at the beginning of last year.

As at March 31, its fleet comprised 103 passenger planes. SIA is sticking to plans to cut its capacity by 11 per cent this year.

The airline group said advance bookings showed a levelling out of the decline in ticket demand.

'However, the probability of a sustained recovery has been set back by uncertainties arising from the Influenza A epidemic,' it added. Meanwhile, downward pressure on ticket prices and yield continues.

On the other hand, jet fuel price is significantly down from last year.