SIA shares take off following MCB redemption announcement

Singapore Airlines’ shares soared on Wednesday after the company announced its intention to redeem the first tranche of its rights mandatory convertible bonds. Also boosting the stock were earnings upgrades by some investment houses, citing strong demand for air travel.

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The stock rose 10 cents to $5.14 by midday with over 2.3 million shares changing hands, which was one of its biggest single session gains in recent months.

This comes after the company on Tuesday announced that it would redeem $3.5 billion of rights MCB on Dec 8, 2022. The 10-year MCBs were issued in mid-2020 to support the company’s balance sheet amid an almost total shutdown of air travel during the pandemic. The conversion price of these bonds $4.84 per share.

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The bonds will be redeemed at 110.408 per cent of the principal amount, implying a total payout of $3.86 billion. The redemption will also prevent a potential stock dilution should bondholders later convert their holdings to shares.

Analysts noted that the company had the financial wherewithal to not only to redeem this first tranche, but also a second tranche of MCB’s issued in 2021, when it raised another $6.2 billion.

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“SIA has a strong balance sheet with $16 billion in cash as of Jun 22, and hence can fund this redemption easily through existing cash.,” noted Morgan Stanley, which has a $6.30 price target on the stock. It added that the early redemption of the bonds alludes to management’s rising confidence in the sustainability of the ongoing recovery in passenger demand.

Meanwhile, UBS said it expected SIA to redeem the remaining 2021 MCBs before the maturity date of June 8 2030., citing improving operating cashflows as air travel demand recovers.

“After the redemption of the 2020 MCBs, we estimate that adjusted gross debt (including MCBs as debt) will be $21.8 billion and gross cash at $12.3 billion,” UBS noted. “We expect shares to react positively on this announcement, as the redemption appears earlier than market expectations and it reduces the extent of equity dilution.”

Citibank, meanwhile, upgraded the company’s core earnings to $1.2 billion for FY2023, $1.09 billion for FY2024 and $1.2 billion for FY2025 - up from $0.46 billion, $1. 5 billion and $1.1 billion respectively.

Despite the generally upbeat prognosis, analysts also caution that the airline faces some cargo headwinds and potential yield reduction in 2023 as competition heats up. Cargo was the star performer during 2020 and 2021, delivering revenue to the airline at a time with passenger traffic ground to a halt amid the pandemic.

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