SINGAPORE (Feb 12): Singapore Airlines might pride itself on setting standards in luxury air travel, but its shares might have become too cheap for discerning investors.

Corrine Png, founder of independent research firm Crucial Perspective, figures that the airline would fetch more than $15 billion — or about $12.80 a share — if the whole company were to be liquidated. That takes into account the market value of its owned aircraft, of about $11.2 billion; the market value of its stakes in <strong>SIA Engineering Co</strong> and <strong>Virgin Australia Holdings</strong>; and $656 million in cash. Yet, with its shares trading at $10.86 currently, SIA has a market capitalisation of just $12.8 billion.

Why is the company unable to get a better valuation in the market? “It has long been unable to grow its profitability to the extent that many equity investors now see it as a ‘value trap’,” says Png in a recent report. SIA’s average annual earnings over the past five years was just $454 million, less than half of the average $1.1 billion recorded in the preceding decade. Over the same period, the airline’s average net profit margin has also shrunk to 3% from 8.5% previously.

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The slump in profitability is the result of multiple changes and challenges in the industry. Notably, SIA’s market share in long-haul travel has eroded with the aggressive expansion of Middle Eastern and Chinese carriers. Meanwhile, its regional operations have been under pressure by the rise of low-cost carriers.

Last year, SIA set up a “transformation office” to review its business divisions and processes, and improve cost-efficiencies as well as generate new revenue streams. The announcement in May came as the airline reported a quarterly net loss, the first in five years, of $138 million for the January-to-March 2017 period.

In his remarks at the time, CEO Goh Choon Phong promised a “radical’ review of operations and organisational structure that would include “legacy practices”. He also stressed that the restructuring would focus on revenue-generation, and changes would be made “even if it means we have to incur costs at the beginning”.

Yet, making itself more profitable is easier said than done. Analysts who have tracked SIA over the years say the airline is already one of the most cost-efficient full-service carriers in the industry. And, pushing for further improvements in profitability could be detrimental to its brand and business. Anecdotal evidence already points to some customer dissatisfaction with the standards of SIA’s inflight food, beverage and service standards, Png notes.

Recently, the company’s attempts to impose charges for credit card bookings and seat selection and to automatically include travel insurance in ticket bookings drew such a fierce backlash that the airline had to beat a hasty retreat. “It’s just unfortunate,” says UOB Kay Hian analyst K Ajith. “They’re doing what every other airline is doing. They have a responsibility to shareholders to maximise profit.”

So, what is to be done? According to Png, SIA is sitting on a gold mine of passenger data that could be the key to its “revival and escape from the value trap label”. The way she sees it, SIA could exploit lots of opportunities related to inflight shopping, and even the selling of premium seats, extra baggage allowances, and hotel rooms and car rentals. “They have a very captive market in the sky,” she says. “[It] must become as much of a tech company as it is an airline to successfully monetise passenger data and present itself as an essential partner to the internet giants.”

In fact, SIA has already earmarked several hundred million dollars to digitalise its operations, which would ostensibly include building a database and using data analytics to capitalise on the information collected. It has started a digital innovation unit and is encouraging its employees to submit ideas for change. Interestingly, Png notes in her report that SIA’s CEO Goh has undergraduate and graduate degrees in computer science, management science and cognitive science from the Massachusetts Institute of Technology. In 1990, he was deciding whether to pursue a doctorate in artificial intelligence, before the company called him back.

The market has yet to respond to SIA’s digitalisation moves. On the contrary, this past week, amid a rout in global stock markets, shares in SIA declined nearly 5% despite launching a KrisFlyer digital wallet app that uses blockchain technology. The app will allow frequent flyers to spend their miles at partner retailers. “The re-rating [of SIA’s stock price] will come when investors see results from the transformation,” Png tells The Edge Singapore.

In the nearer term, however, SIA is benefiting from a cyclical improvement in load factors. And, with slower capacity growth among Asia-Pacific carriers forecast for this year, SIA’s yields could improve, according to Ajith of UOBKH. He estimates that passenger yields will rise 2.7% in 2HFY2018 ending March, and a further 1.6% rise in FY2019. He forecasts that FY2018 earnings will come in at $627 million, more than double from the year before, and rise a further 15% in FY2019.

In January, UOBKH upgraded SIA’s stock to a “buy”, from a “hold”, with a higher price target of $11.90. That target is 9.6% above the current market price of the stock. But it is still only 0.9 times its estimated book value (excluding the stake in SIA Engineering). The price target is also 7% below Png’s estimate of SIA’s liquidation value.

If SIA is to escape being a value trap, it needs to try something new fast.

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