Are these stocks really cheap?
The Business Times front page headline this morning was mundane enough: "Blue chips hover close to lows in jittery market". But what was written underneath in the subheading was far more interesting: "Price-earnings ratio of ST Index stocks just 11 times; some sense buying opportunities". Our contention is not that the Business Times got it wrong. By P/E ratio these stocks may be cheap - and at 11x, it is cheap! But it is not the only measurement to use. Let's investigate this further.
Price-earnings multiples measure how many years must pass for a company to earn per share what it costs per share. But while that tells us something about how much of future earnings have been priced into the stock, it tells us nothing about whether we are getting value for money. And that has to be the ultimate measurement of any purchase, including stocks. The price-book ratio does this, and according to Reuters there are lots of expensive stocks around:
If we are looking for an understanding of performance, there is another measurement better than price-earnings: Yield. It answers the question of how much we get paid to simply own the stock. According to the DBS website, you get 0.825% interest (in other words, pittance) for every S$10,000 you invest for 12 months. So, only stocks that pay more than this are of interest. And according to Reuters, the yield also leaves to be desired. High yielding stocks are often problematic ones.
There is an even better way to measure performance, and that is the price-free cash flow ratio. How much cash is the company generating per share, compared to what it costs per share. And using this measurement, there are many many stocks which come up with zero or negative numbers. In other words, they are not throwing off excess cash. But there are also some good performers:
Having now gone through this exercise, our broad sweeping statement that's not to be taken as investment advice is this: stocks are indeed historically cheap. They are not a steal, but they are at levels where one might now say, when will these stocks ever get cheaper?
Mark Laudi, who owns SIA shares.
Price-earnings multiples measure how many years must pass for a company to earn per share what it costs per share. But while that tells us something about how much of future earnings have been priced into the stock, it tells us nothing about whether we are getting value for money. And that has to be the ultimate measurement of any purchase, including stocks. The price-book ratio does this, and according to Reuters there are lots of expensive stocks around:
DBS: 1.24xEven to buy S$1 worth of value in DBS, you have to pay S$1.24 for it.
SIA: 1.25x
Jardine Cycle & Carriage: 2.1x
Comfort Delgro: 2.2x
SingTel: 2.9x
Dairy Farm: 17.8x
StarHub: 72.3x
If we are looking for an understanding of performance, there is another measurement better than price-earnings: Yield. It answers the question of how much we get paid to simply own the stock. According to the DBS website, you get 0.825% interest (in other words, pittance) for every S$10,000 you invest for 12 months. So, only stocks that pay more than this are of interest. And according to Reuters, the yield also leaves to be desired. High yielding stocks are often problematic ones.
There is an even better way to measure performance, and that is the price-free cash flow ratio. How much cash is the company generating per share, compared to what it costs per share. And using this measurement, there are many many stocks which come up with zero or negative numbers. In other words, they are not throwing off excess cash. But there are also some good performers:
UOB: 7.39 cents per shareIn short, stocks may be cheap on a P/E basis, but you have to look at other measurements to gain an accurate picture.
Jardine Matheson: 3.9 cents
Singapore Airlines: 2.57 cents
Having now gone through this exercise, our broad sweeping statement that's not to be taken as investment advice is this: stocks are indeed historically cheap. They are not a steal, but they are at levels where one might now say, when will these stocks ever get cheaper?
Mark Laudi, who owns SIA shares.
Labels: comfortdelgro, Dairy Farm, DBS, Jardine, Jardine Matheson, Singapore Airlines, SingTel, StarHub, UOB
Singapore to KL flights: Going to be a race to the bottom now
Ah, the smell of deregulation in October. The news has finally broken that Air Asia, who has long sought to break into the KL to Singapore air route, will finally get its wish soon as Malaysian officials gave the green light for 2 flights a day, as well as flights to be operated by a Singaporean budget carrier (it's almost a sure bet that that will be Tiger Airways).
Competition for consumers is good, it drives companies to perform better and offer quality products and services priced competitively. SQ and MH have long held an almost absolute monopoly on this route for years, and prices have been sky high. A recent check of a weekend roundtrip flight to Kuala Lumpur came in at S$436. Air Asia will undoubtedly bring that price down, possibly as low as $60 each way (Tony Fernandes, Air Asia CEO has alluded to the price being as low as this amount).
What you will see then is a race to the bottom. Whether or not SQ or MH price their flights as low as Air Asia remains to be seen, but if it is any indication of how an LCC moving on to a highly lucrative route works out for the major carriers, look at the United States. In the markets that Southwest Airlines operates, prices have come down, and quite often on the exact same routes, Southwest is the same price as United Airlines or American Airlines.
Lower prices will ultimately mean thinner margins for MH and SQ. But there is some good news here on the business side of things. SQ owns 49% of Tiger Airways, so at least all is not lost.
What this ultimately means for you? Well, cheaper prices and fares for starters. For the airlines, and their bottom line, thinning margins as things become tighter. This particularly holds true in the United States but not so much here in Asia. We'll wait until the flights take off to see just exactly what happens.
-Curtis Bergh
Competition for consumers is good, it drives companies to perform better and offer quality products and services priced competitively. SQ and MH have long held an almost absolute monopoly on this route for years, and prices have been sky high. A recent check of a weekend roundtrip flight to Kuala Lumpur came in at S$436. Air Asia will undoubtedly bring that price down, possibly as low as $60 each way (Tony Fernandes, Air Asia CEO has alluded to the price being as low as this amount).
What you will see then is a race to the bottom. Whether or not SQ or MH price their flights as low as Air Asia remains to be seen, but if it is any indication of how an LCC moving on to a highly lucrative route works out for the major carriers, look at the United States. In the markets that Southwest Airlines operates, prices have come down, and quite often on the exact same routes, Southwest is the same price as United Airlines or American Airlines.
Lower prices will ultimately mean thinner margins for MH and SQ. But there is some good news here on the business side of things. SQ owns 49% of Tiger Airways, so at least all is not lost.
What this ultimately means for you? Well, cheaper prices and fares for starters. For the airlines, and their bottom line, thinning margins as things become tighter. This particularly holds true in the United States but not so much here in Asia. We'll wait until the flights take off to see just exactly what happens.
-Curtis Bergh
Labels: Kuala Lumpur, Malaysia Airlines, Singapore Airlines, Tiger Airways
Open note to SQ: Sell the Virgin stake NOW while you can!
Virgin Atlantic, 49% owned by Singapore Airlines, reported rather lackluster earnings the other day dragged down by Virgin Nigeria's performance. Higher fuel costs (particularly now and on the horizon), Virgin Nigeria operating in a tough environment, and open skies coming into force in early 2008 across the Atlantic, and the conditions seem ripe to me for Singapore Airlines to do what it should have done a while ago: sell the 49% stake back to Sir Richard and co.
Here are some of the highlights of Virgin's performance for the quarter:
-Profit down from £60.3 mln to £6.6 mln
-Revenue was up 16% to £2.2 bln
-Passenger numbers up from 4.8 mln to 5.3 mln
Virgin Nigeria was one of the main reasons earnings got dragged lower. When you think about it, that airline already operates in an extremely tough market to begin with. Finding success for them is something that could take a while, that is, if success ever comes their way.
Taking into consideration that open skies across the Atlantic will soon come into force and suddenly the market operating environment for Virgin Atlantic becomes a lot tougher on their bread and butter routes. A number of airlines that had previously not held route authority to Heathrow airport have already stated their intention to fly into what has been one of Virgin Atlantic's traditional hubs (over London's Gatwick airport). Granted the transatlantic market between London and the United States is the largest of them all, competition however will become much fiercer and cut throat as airlines work to undercut each-others market share on routes.
Energy costs continue to rise, particularly for jet fuel. Singapore Airlines hiked its fuel surcharge again recently, and crude prices also continue to trade in the $70 range.
With all these conditions, the time is now for SQ to sell their stake in my opinion, before the earnings picture gets even uglier than this.
Curtis Bergh
Here are some of the highlights of Virgin's performance for the quarter:
-Profit down from £60.3 mln to £6.6 mln
-Revenue was up 16% to £2.2 bln
-Passenger numbers up from 4.8 mln to 5.3 mln
Virgin Nigeria was one of the main reasons earnings got dragged lower. When you think about it, that airline already operates in an extremely tough market to begin with. Finding success for them is something that could take a while, that is, if success ever comes their way.
Taking into consideration that open skies across the Atlantic will soon come into force and suddenly the market operating environment for Virgin Atlantic becomes a lot tougher on their bread and butter routes. A number of airlines that had previously not held route authority to Heathrow airport have already stated their intention to fly into what has been one of Virgin Atlantic's traditional hubs (over London's Gatwick airport). Granted the transatlantic market between London and the United States is the largest of them all, competition however will become much fiercer and cut throat as airlines work to undercut each-others market share on routes.
Energy costs continue to rise, particularly for jet fuel. Singapore Airlines hiked its fuel surcharge again recently, and crude prices also continue to trade in the $70 range.
With all these conditions, the time is now for SQ to sell their stake in my opinion, before the earnings picture gets even uglier than this.
Curtis Bergh
Labels: Earnings, Singapore Airlines, Virgin Atlantic
Open Note to SIA: Sell the Virgin Stake
SIA's looking to sell it, Sir Branson wants it back: the 49% stake that Singapore Airlines has in Virgin Atlantic - that has long been a dog in SIA's earnings reports - may finally get a one way ticket back to the U.K.
I say sell it. give Sir Richard Branson back what he seems to want back. His exact words on the subject: "We will be happy to have a look at their stake should Singapore want to sell it." That to me is business lingo for 'I really want it!' Anytime an executive utters words like that means that they will seriously consider an offer if it is put before them, and, the stars are aligned enough in this case where I think you would see Virgin buy back the stake.
For Singapore Airlines, it is a good move i think because Virgin Atlantic has long been the laggard on the earnings announcements for SIA as of lately, and SIA would make a substantial 'one-off' gain from the sale (most likely more than what they originally purchased the stake for).
SIA's keen interest in China Eastern may signal a shift that they are looking for stakes in airlines in growing markets (such as China), rather than more established markets such as transatlantic flights from Europe to the U.S. where the bulk of Virgin's destinations lie. The stake in Virgin did open up a lot of doors for SIA back when it happened. SIA gained access to key routes from London to east coast destinations in the U.S. that Virgin flew too.
But now, with the recent loosening of the regulation between the U.S. and Europe, competition will increase on routes, tightening margins for airlines. Risky, if you ask me.
All in all, SIA should do it, from a business standpoint it makes sense, and from a strategic standpoint, the Virgin stake just simply isn't working the magic for them anymore like it once used to.
Curtis Bergh
I say sell it. give Sir Richard Branson back what he seems to want back. His exact words on the subject: "We will be happy to have a look at their stake should Singapore want to sell it." That to me is business lingo for 'I really want it!' Anytime an executive utters words like that means that they will seriously consider an offer if it is put before them, and, the stars are aligned enough in this case where I think you would see Virgin buy back the stake.
For Singapore Airlines, it is a good move i think because Virgin Atlantic has long been the laggard on the earnings announcements for SIA as of lately, and SIA would make a substantial 'one-off' gain from the sale (most likely more than what they originally purchased the stake for).
SIA's keen interest in China Eastern may signal a shift that they are looking for stakes in airlines in growing markets (such as China), rather than more established markets such as transatlantic flights from Europe to the U.S. where the bulk of Virgin's destinations lie. The stake in Virgin did open up a lot of doors for SIA back when it happened. SIA gained access to key routes from London to east coast destinations in the U.S. that Virgin flew too.
But now, with the recent loosening of the regulation between the U.S. and Europe, competition will increase on routes, tightening margins for airlines. Risky, if you ask me.
All in all, SIA should do it, from a business standpoint it makes sense, and from a strategic standpoint, the Virgin stake just simply isn't working the magic for them anymore like it once used to.
Curtis Bergh
Labels: Richard Branson, Singapore Airlines, Virgin Atlantic
SIA & China Eastern: expect turbulence
So we all know now that Singapore Airlines is taking a nearly US$1 bln stake (roughly 25%) in China Eastern, but don't think this is exactly going to be smooth sailing entirely. In fact, expect turbulence.
First, Singapore Airlines taking a stake in a foreign carrier isn't exactly their cup of tea to begin with, and they have not had a great track record in the past (case in point: Air New Zealand, Virgin Atlantic).
SIA once held a 25% stake in Air New Zealand, which was later reduced to 6.3% following the New Zealand governmental rescue in 2001 of ANZ after a slew of problems with ANZ and Ansett. It then divested that 6.3% stake for next to nothing.
The 49% stake in Virgin Atlantic has also not been something that has been entirely "awesome" for SIA; case in point, look at their latest FY earnings from a few months ago and the comments on Virgin Atlantic. Not good.
Now SIA is dabbling with China Eastern. Concerns have surfaced about the deal and the Singapore government's role in it, but it is widely expected Beijing will approve it. Still, China Eastern operates at a loss (the only one in China to do so)and it remains to be seen just how far SIA will be able to affect change at the carrier.
While China Eastern does have its hub in Shanghai, and Singapore Airlines now has a foot in the door with the mainland chinese market, enacting change at China Eastern is something I don't think is likely, and at the end of the day its all about dollars and cents which is what everyone cares about; and thats the biggest problem at China Eastern now.
Curtis Bergh
ArchivesFirst, Singapore Airlines taking a stake in a foreign carrier isn't exactly their cup of tea to begin with, and they have not had a great track record in the past (case in point: Air New Zealand, Virgin Atlantic).
SIA once held a 25% stake in Air New Zealand, which was later reduced to 6.3% following the New Zealand governmental rescue in 2001 of ANZ after a slew of problems with ANZ and Ansett. It then divested that 6.3% stake for next to nothing.
The 49% stake in Virgin Atlantic has also not been something that has been entirely "awesome" for SIA; case in point, look at their latest FY earnings from a few months ago and the comments on Virgin Atlantic. Not good.
Now SIA is dabbling with China Eastern. Concerns have surfaced about the deal and the Singapore government's role in it, but it is widely expected Beijing will approve it. Still, China Eastern operates at a loss (the only one in China to do so)and it remains to be seen just how far SIA will be able to affect change at the carrier.
While China Eastern does have its hub in Shanghai, and Singapore Airlines now has a foot in the door with the mainland chinese market, enacting change at China Eastern is something I don't think is likely, and at the end of the day its all about dollars and cents which is what everyone cares about; and thats the biggest problem at China Eastern now.
Curtis Bergh
Labels: China Eastern, MU, Shanghai, Singapore Airlines, SQ, Turbulence
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