Path to prosperity

In its outlook statement, SIA mentioned that the recovery in international air travel is slower than expected and industry experts have continued to revise their projections downward. A full recovery could take 2-4 years according to industry forecasts. For SIA, its own forecasts are that passenger capacity would not reach 50% of pre-Covid levels by the end of FY21 (Mar 2021) and will continue to re-assess its fleet size and network. For the end of 2QFY21, SIA projects that its passenger capacity would be c.7% of pre-Covid levels, a >7x jump from the current levels of <1% of pre-Covid. 

SIA appears more positive on cargo recovery as the reopening of economies and manufacturing plants could imply a greater need for air freight. It is also looking to deploy cargo-only passenger flights when justified. SIA currently has 7 freighters and 33 passenger aircraft that are deployed on cargo-only services. 

When the recovery comes possibly in 2022, SIA will also have to bear the extra maintenance costs of getting their parked aircraft back to air-worthy shape. It currently has 119 aircraft parked at Changi Airport and 29 in Alice Springs. I also do hope that by 2022, most of SIA's high fuel hedges have worn off and SIA can start getting better margins. 

On the bright side, SIA has raised $8.8bn from the rights issue and secured other lines of financing worth c.$2.2bn since Mar20 and this could put it in a better shape vis-a-vis competitors who may not have the backing of a strong parent. We have also seen other airlines like AirAsia having going concern issues and this could be a slight positive when the recovery does come for surviving airlines. 

Overall, I believe that this set of results is more negative than expected and could lead to a further softening of SIA share price. 

I believe the decline would have been even worse if Ascott had compared it on a same-store basis since there was the merger between Ascott and Ascendas Hospitality that would have boosted the distributable income. During 1H2020, 21 of Ascott's properties were temporarily closed due to the pandemic. Since then, 12 properties have reopened and 7 more are scheduled to reopen in 3Q20. 

Operationally, we also saw the benefit of having master leases or management contracts with minimum rents. From a gross profit standpoint, management contracts experienced the worst decline of -61% while master leases actually grew 51%, although partially contributed by the Ascendas merger. 

Ascott has further highlighted that it has a highly diversified set of revenue streams from a geographical perspective and this could help with the recovery. As mentioned in a previous article, exposure to non-Singapore countries allows Ascott to ride on the push for domestic tourism compared to its SG-focused peers. The higher APAC exposure also allows it to ride on the strong response to Covid that APAC countries have had relative to Europe and the US. 

I expect Ascott's hotel-focused peers to be even worse off as serviced residences tend to have a more stable occupancy due to longer stays. Additionally, in its largest country, Japan, Ascott actually has residential properties that it is renting out, which provides further stability to income. 

At its current price of 90cents, Ascott provides an annualized yield of 2.3% (taking 1.05Scts multiplied by 2). In reality, the yield could be around 2.5% assuming Ascott pays out the amounts retained. At such low yields, I do not believe that investing in Ascott shares provide good risk-return ratio. In fact, investing in their perpetuals might be a better choice since it has seniority over common shares and provides a higher yield at 3.07%.