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GROUP 2 TUTORIAL A BX2031
Assessment 2 – Group Project
Group 2
Pham Song
Duong Duc Tien
Chandra Widodo Matthew
Hui Xuan Tan Edelyne
College of Business, Law & Governance, James Cook University –
Singapore BX2031: Investment and Portfolio Analysis
Professor Thanh Nguyen
20 April 2024
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Table of Contents
Table of Figures
I. Executive Summary
This research thoroughly evaluates the financial health and investment prospects of
Singapore Airlines Limited (SIA) and Singapore Exchange Limited (SGX) using detailed
financial models such as Price-to-Earnings (P/E) ratios, Capital Asset Pricing Model
(CAPM), and Dividend Discount Model (DDM). According to our study, both companies not
only outperform the broader market in terms of predicted returns while also managing
industry-specific risks with remarkable strategic acumen.
SIA has recovered strongly from the financial effects of the COVID-19 pandemic, as
indicated by its most recent revenue data, demonstrating its resilience and effective
management practices. On the other hand, SGX's profitability remains solid and consistent, as
evidenced by its vital role in Singapore's financial sector and robust income sources.
Both companies' risk assessments show higher volatility than the market, but SGX has
a lower beta value, showing less vulnerability to market changes, making it a more stable
investment than SIA, which has a higher risk but potentially higher return profile.
The research aims to guide investors through presenting an in-depth examination of
each company's financial position, risk profile, and possible returns, allowing for more
informed portfolio management and investing strategies.
II. Introduction
Trading as "C6L.SI" on the Singapore Exchange, Singapore Airlines Limited (SIA) is
a prominent player in the global aviation industry. Renowned for its exceptional service and
extensive route network, SIA stands as one of the leading airlines in Asia-Pacific. With its
hub at Singapore Changi Airport, SIA connects passengers to destinations across the globe,
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catering to both leisure and business travellers. SIA was also named “World’s Best Airline”
in the 2023 Skytrax World Airline Awards, the fifth time it has won this prestigious accolade
(Singaporeair, 2024). From a financial standpoint, SIA has demonstrated resilience and
adaptability in the face of challenges. Despite the turbulence caused by events like the
COVID-19 pandemic, SIA has shown agility in managing its operations and maintaining
financial stability. SIA generated a revenue of about S$17.76 billion in the fiscal year
2022/2023. Due to the COVID-19 pandemic, Singapore Airlines' revenue in 2020/2021
dropped to about S$3.8 billion from the S$15.98 billion recorded in the previous fiscal year
(Statista, 2023). However, total revenue reached its highest level over the period measured in
2022/2023, indicating a clear sign of recovery. These financial figures underscore SIA's
strong position within the aviation sector and its ability to navigate turbulent market
conditions effectively. Risks and challenges abound in the airline industry, including fuel
price volatility, regulatory changes, and geopolitical tensions. However, SIA's strategic
initiatives, including fleet modernization (Sobie, 2021) and major global expansion of its
route network (Field, 2023), position it well for future opportunities and challenges.
On the other hand, trading as "S68.SI" on the Singapore Exchange, Singapore
Exchange Limited (SGX) serves as the premier securities and derivatives exchange in
Singapore, playing a pivotal role in the country's capital markets ecosystem. Serving as a
vital hub for capital markets in the region, SGX facilitates the trading of a wide range of
financial instruments, including equities, bonds, and derivatives. From a financial standpoint,
SGX has demonstrated robust performance and financial stability over the years. In the fiscal
year 2023, SGX reported a total revenue of S$1,194.4 million in its financial report,
reflecting its ability to generate significant income from its core operations. Moreover, SGX
achieved a net profit of S$503 million (SGXGroup, 2023) for the same period, indicating its
capacity to maintain profitability amid changing market dynamics and competitive pressures.
Furthermore, SGX's commitment to delivering shareholder value is evident through its
dividend distribution policies. In 2023, SGX distributed a total dividend of SGD 0.34 per
share to its shareholders (SGXGroup, 2023), underscoring its dedication to providing
attractive returns to investors. SGX's commitment to innovation and technological
advancement is evident through initiatives aimed at enhancing market efficiency and
accessibility. From introducing new products and services to implementing cutting-edge
trading technologies, SGX remains at the forefront of driving growth and development in the
financial industry. Despite facing challenges such as market competition and regulatory
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changes, SGX continues to attract investors seeking exposure to Singapore's vibrant capital
markets. By maintaining a focus on integrity, transparency, and investor protection, SGX
reinforces its position as a trusted and reliable exchange platform for investors worldwide.
III. Company’s risks and returns
Expected return
Figure 1 Expected returns summary chart (derived from appendix 1)
SIA exhibits an anticipated monthly return of 0.40%, translating to an annualized
return of 4.76%, while SGX boasts a monthly expectation of 0.73% and an annualized return
of 8.78%. Relative to the overall market with its modest anticipated monthly return of 0.13%
and annualized return of 1.58%, both SIA and SGX outshine the market, underscoring their
robust performance. Potential drivers behind SIA's performance include its relentless pursuit
of cost efficiency and route optimization, while SGX's robust performance could be attributed
to its pivotal role as a leading exchange hub, fostering investor confidence and trading
activities.
Over the last five years ending on 31st December 2023, the monthly share price data
for Singapore Airlines Limited (SIA) and Singapore Exchange Limited (SGX) unveils
intriguing insights into the company's performance and inherent volatility. The monthly
return series, calculated from historical share price data, can be visualized through a line
graph or a histogram. Each data point on the plot represents the percentage change in stock
price from one month to the next, capturing the fluctuation in returns over the specified time
frame. Upon plotting the monthly return series, it's essential to assess whether the distribution
of returns follows a normal distribution. A normal distribution is characterized by a
symmetrical shape, with many data points clustered around the mean and fewer data points in
the tails (Chen, 2024).
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Analysing the distribution of monthly returns for both SIA (Figure 1) and SGX
(Figure 2), deviations from normality provide insights into their risk profiles. A bell-shaped
curve with few outliers suggests stability and predictability in returns, reassuring for
investors. Conversely, skewness, kurtosis, or significant deviations from symmetry indicate
non-normal distribution, potentially attributed to market volatility or company-specific
events. In such cases, caution is advised, and investors should consider the implications of
heightened volatility on their investment decisions.
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Figure 2 SIA monthly return series (derived from appendix 1)
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Figure 3 SGX monthly return series (derived from appendix 2)
The observed discrepancy in volatility between Singapore Exchange Limited (SGX)
and Singapore Airlines Limited (SIA) monthly return series can be attributed to several
underlying factors inherent to their respective industries, business models, and market
dynamics. There are two key reasons why SGX's monthly return series appears to be more
volatile than that of SIA, as evidenced by the line graph and histogram.
Firstly, industry dynamics and market sensitivity differentiate the volatility between
SGX and SIA. SGX operates within the financial services sector, where markets are sensitive
to external economic factors, geopolitical events, and regulatory changes. Fluctuations in
interest rates, investor sentiment, and trading volumes significantly impact SGX, leading to
heightened volatility in its monthly returns. In contrast, SIA operates in the airline industry,
which experiences less frequent and dramatic fluctuations compared to financial markets due
to factors like fuel prices, competition, and passenger demand. Thus, SIA's monthly return
series tends to display relatively lower volatility compared to SGX.
Secondly, regulatory environment and market structure play a crucial role. SGX
operates within a highly regulated environment, subject to oversight by regulatory bodies and
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compliance requirements. Changes in regulations or market structure reforms introduce
uncertainty and volatility into SGX's operations and financial performance. Additionally, its
role as a central marketplace for trading various financial instruments exposes it to
fluctuations in trading volumes and liquidity, further amplifying volatility in its monthly
returns. Conversely, while SIA is also regulated, the airline industry experiences less
regulatory turbulence. Moreover, SIA's revenue streams primarily stem from passenger and
cargo transportation, which have relatively stable demand patterns over time, contributing to
lower volatility in its monthly return series.
In a nutshell, plotting the monthly return series showcases notable deviations from
normal distribution for both companies, hinting at inherent volatility and potential for outlier
events. However, it's imperative to delve into the expected returns for a comprehensive
evaluation. Hence, based on Figure 5, the expected monthly and expected annual returns for
SIA and SGX were calculated and compared against the broader market.
Standard deviation and correlation coefficient
Figure 4 SIA and SGXs standard deviation and correlation efficient
Delving deeper into risk metrics, both SIA and SGX exhibit elevated volatility
compared to the overall market based on Figure 6. SIA's monthly standard deviation of
returns stands at 7.96%, with an annualized standard deviation of 27.56%, reflective of the
airline industry's cyclical nature and susceptibility to external shocks. Conversely, SGX
displays a monthly standard deviation of 7.56% and an annualized standard deviation of
18.44%, potentially stemming from market sentiment fluctuations and regulatory changes.
These elevated risk profiles necessitate a cautious approach, particularly for risk-averse
investors keen on preserving capital stability.
Furthermore, the correlation coefficient between SIA and SGX is a modest 0.17,
indicating a weak positive correlation. This implies limited diversification benefits for
investors seeking to allocate funds across both shares. Despite the weak correlation, prudent
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portfolio diversification strategies should be employed to mitigate single-stock risk exposures
effectively.
Recommendation
For a risk-averse investor, the decision hinges on balancing returns against risk. While
SIA offers a higher return, it also comes with greater volatility, potentially unsettling for
conservative investors. On the other hand, SGX presents a slightly lower return but with
comparatively lower risk, making it a more palatable choice for risk-averse investors seeking
stability in their portfolio. Hence, a risk-averse investor might lean towards allocating their
funds into SGX, leveraging its stable performance and lower risk profile to safeguard their
investment capital while still reaping decent returns.
IV. Beta estimation and valuation using CAPM Model
Beta estimation
Figure 5 SIA and SGX’s beta value (derived from appendix 3)
To get the beta estimation for Singapore Airlines and Singapore Exchange, we need to
run a regression analysis on Excel. After conducting the regression analysis with Singapore
Airlines and Singapore Exchanges share values in conjunction with the Singapore market
return, we obtained the beta values for Singapore Airlines resulting in 0.91 and Singapore
Exchange resulting in 0.18 respectively. The beta values of a company can show how its
stocks will respond according to the changes in the Singapore market. For instance, If the
Singapore market moves by 1%, Singapore Airline’s stock is expected to move by 0.91%,
while the Singapore Exchange's stock is expected to move by 0.18%. This works both ways,
if the market goes up by 1% then SIA and SGX stocks will go up by 0.91% and 0.18%
respectively, however, if the market goes down by 1%, then SIA and SGX stocks will fall
accordingly. A higher beta value can bring more potential returns, but it comes with a cost of
higher risk, conversely, a lower beta value may only give smaller returns but the risk will also
be smaller. For risk-averse investors, it is better to invest in a company with lower beta value.
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In this case, it is recommended for the investor to invest in Singapore Exchange Limited
(SGX) which has a smaller beta value compared to Singapore Airlines Limited (SIA).
Expected rate of return
Figure 6 SGX and SIA’s CAPM-based expected return and alpha value.
The benchmark for risk-free rate is determined by Singapore's present 10-year bond
yield, which sits at 3.375%. Meanwhile, the market rate aligns with Singapore's implied
market return, currently at 8.74%. This results in a market risk premium of 5.37%. (refer to
appendix x). By using the Capital Asset Pricing Model (CAPM) formula: 𝐸(𝑟) = 𝑟𝑓 + 𝛽 ×
(𝑟𝑚 − 𝑟𝑓), we can calculate SIA and SGX’s expected annual returns, SIA has a CAPM
expected return of 8.26% while SGX has 4.34%. Therefore, based on the CAPM's expected
return, SIA will look more appealing to the investors compared to SGX because it has higher
profitability. Additionally, this outcome can be further examined through the analysis of their
alpha values, which are calculated by subtracting the CAPM-predicted return from the
expected return. As shown in Figure 6, SIA has an Alpha value of 4.86% and SGX has an
Alpha value of 4.44%. A positive alpha value indicates that an investment is outperforming
its expected return to a greater extent than expected, potentially offering better risk-adjusted
returns. This reaffirms that SIA, with a superior Alpha value, represents a more optimal
selection.
V. Valuation and forecast using Dividend Discount Model
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Figure 7 SGX and SIA’s future dividend growth based on last 10 years data (derived from
Appendix 5)
To forecast future dividend growth, we compute the mean of the annual dividend pay-
outs for SIA and SGX over the last 10 years, also considering the years impacted by the
COVID-19 pandemic (2020 to 2021) to provide a more accurate valuation of the impact of
COVID-19 to the company financial performance. The 10-year average growth rate for SIA,
when excluding COVID-19 years, stands at 52.56%, compared to 35.61% when including
them. On the other hand, SGX demonstrates a dividend annual growth rate of 1.70% without
considering COVID-19 years and 1.99% when factoring them in. The COVID-19 years have
had a substantial effect on the SIA growth rate, unlike SGX which seems unaffected.
Figure 8 Forecasted dividend of SIA and SGX from 2024 to 2026
Figure 8 shows the forecast dividend payment of SIA and SGX by calculating the
future dividend using the formula [D(1+g)]. At the end of three years, SIA’s dividend per
share is $0.95 when including the Covid years and $1.35 when excluding Covid years.
Conversely, SGX’s have the same dividend per share which is $0.35 when including or
excluding the Covid years.
Figure 9 The comparison of SIA and SGX’s intrinsic and market share value
The calculation will use the last 10 years' data to calculate future dividend payments
from 2027 onwards if the dividend payment in 2027 is an average of the previous three years
(2024-2026) and will remain constant thereafter. Following by applying the appropriate
formula to discount future cash flows we got the intrinsic value of $8.70 for SIA and $7.91
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for SGX respectively. If we compare these intrinsic values with the market value in 2023 as
shown in Figure 9, SIA shares were undervalued, whereas SGX's stock was overvalued.
These results imply that it is recommended to take a long position for SIA and a short
position for SGX.
VI. Valuation and forecast using PE Model
By carefully analysing their past financial data and projecting future performances, the
Price-to-Earnings (P/E) ratio model financial analysis provides a deep insight into the
valuation and prospects of Singapore Airlines (SIA) and Singapore Exchange (SGX). Based
on the assessment of the P/E ratio, EPS, and anticipated share prices until 2024, this research
enables a thorough comprehension of each company's investment attractiveness.
The airline industry's vulnerability to external disturbances is reflected in SIA's
fluctuating EPS from 2019 to 2023, with negative EPS in 2020 and 2021, according to
historical data. Due to these losses, SIA's P/E ratio fluctuated greatly and averaged -11.55,
reflecting this volatility. On the other hand, SGX showed more steady financial growth, with
EPS rising steadily over the same time and an average P/E ratio of 19.79, indicating strong
investor confidence in the company's financial stability and room to grow.
In 2024, SIA is expected to make a significant comeback, with an estimated EPS of
0.90, suggesting that it may be able to recover from its previous losses. With an anticipated
EPS of 0.50 for 2024, SGX is predicted to maintain its growth trend, demonstrating its
continued stability and profitability. These tendencies are further supported by the projected
share prices for 2024, when SIA's share price is predicted to increase to $6.51, suggesting a
possible reversal. It is anticipated that the share price of SGX will rise to 9.95, bolstering its
consistent financial growth.
Figure 10 SGX and SIAs actual and forecasted share price (derived from Appendix 7)
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Investment suggestions identify SIA as currently undervalued, implying a great
opportunity for investors looking to capitalize on the airline's future revival. With an
anticipated share price that exceeds the current value, SGX appears to be undervalued,
making it an appealing investment opportunity for individuals looking for a solid and
developing financial organization.
With its recovery trajectory, SIA may pose higher risks but also offer considerable
returns, coinciding with a risk-tolerant investment philosophy. SGX, with its stable
performance and development potential, appeals to investors who value stability and gradual
growth. This analytical method advises investors to assess these qualities against their
specific investing objectives and risk tolerance to make informed judgements.
VII. Investment opportunity set
Figure 11 Investment opportunity set for SIA and SGX shares (derived from Appendix 8)
The chart shown above presents the investment opportunity set for Singapore Airlines
Limited (SIA) and Singapore Exchange Limited (SGX). The Capital Allocation Line (CAL)
is displayed in orange, and the Efficient Frontier is shown in blue. The CAL represents the
complete portfolio, formed by plotting both the risk-free portfolio and the optimal risk
portfolio. On the other hand, the Efficient Frontier represents the risky portfolio, which varies
allocations of risky assets.
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The risk-free portfolio, offering a 3.38% return with zero standard deviation, is located
at the point where it intersects with the vertical axis. The minimum-variance portfolio,
including 43% to SIA and 57% to SGX, is located at the leftmost point on the Efficient
Frontier. It delivers a 10.512% return and a minimal standard deviation of 14.905%. The
tangent point represents the optimal risk portfolio, comprising 63% SIA and 37% SGX,
which results in an optimal risk-return balance at 11.509% return and 15.740% standard
deviation.
Moving along the CAL from the minimum-variance point upwards, the proportion of
risky assets increases while risk-free assets decrease. This raises potential returns at the cost
of greater risk exposure.
Figure 12 Investors’ portfolio allocation
Assuming an investor with a risk aversion level of 3 decides to add a risk-free asset to
the risky portfolio, the proportion of the new portfolio can be calculated using the optimal
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risk portfolio's return and standard deviation. The formula above results in a portfolio
composition of 98.91% in risk-free assets and only 1.1% in risky assets, including 0.66% in
SIA and 0.44% in SGX shares. Specifically, within the risky portfolio, 60% (0.66%/1.1%)
should be allocated to SIA, while the remaining 44% (0.44%/1.1%) should be invested in
SGX to achieve the investor’s desired risk preference.
VIII. Conclusion
Finally, a comprehensive review of Singapore Airlines Limited (SIA) and Singapore
Exchange Limited (SGX) revealed clear insights into their respective financial performance
and prospects. Despite prior instability caused by external problems like as the COVID-19
pandemic, SIA is expected to recover strongly, as evidenced by a positive turn in EPS and an
increase in share price in 2024. This means that SIA may be an appealing alternative for
investors seeking growth and ready to accept greater risk.
On the other side, SGX has solid financial health, as seen by steady profitability,
sustained EPS growth, and sustainable shareholder returns. Its lower beta value compared to
SIA indicates less sensitivity to market fluctuations, making SGX a better pick for risk-averse
investors.
Depending on the investor's risk profile, both companies provide great prospects. While
SIA appeals to those wanting larger profits at potentially higher risks, SGX is better suited to
investors seeking stability and consistent returns. Integrating both companies into a diverse
portfolio could strike a balance between prospective high growth and risk, improving overall
investment outcomes. Therefore, investors should base their decisions on their personal risk
tolerance and investing objectives, exploiting the unique characteristics of SIA and SGX to
maximise portfolio performance.
IX. References
Aviation Source News. (2023, August 7). Singapore Airlines Unveils Global Route Expansion.
https://aviationsourcenews.com/analysis/singapore-airlines-unveils-global-route-
expansion/
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Investopedia. (2024, March 13). Normal Distribution.
https://www.investopedia.com/terms/n/normaldistribution.asp
SGX Group. (2023, August 17). SGX Group Reports FY2023 Net Profit of S$503 Million.
https://www.sgxgroup.com/media-centre/20230817-sgx-group-reports-fy2023-net-
profit-s503-million
Singapore Airlines Limited. (2024, February 20). Investor Relations: Financial Results.
Retrieved from
https://www.singaporeair.com/saar5/pdf/Investor-Relations/Financial-Results/
SGXNET/bu-q3fy2324.pdf
Statista. (2023, September 12). Singapore Airlines: Revenue from FY 2010 to FY 2021.
https://www.statista.com/statistics/1044472/singapore-airlines-revenue/
Wong, R. (2021, June 3). Why is SIA taking delivery of 28 new planes this financial year amid
COVID-19? TODAY Online.
https://www.todayonline.com/commentary/why-sia-taking-delivery-28-new-planes-
financial-year-amid-covid-19
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X. Appendix
Appendix 1: SIA’s data
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Appendix 2: SGX’s data
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Appendix 3: SIA and SGX’s summary output
Appendix 4: Singapore’s market rate, risk-free rate, and market risk premium
Appendix 5: SIA and SGX’s dividend payment for the last 10 years (from 2012 to
2023)
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Appendix 6: P/E ratios of SIA and SGX’s comparable firms (Starhub, M1, OCBC,
and UOB)
Appendix 7: SIA and SGX’s 2024 forecasted earnings-per-share, share price, and
P/E ratio
Appendix 8: the investment opportunity set of SIA and SGX share proportionate from
0% to 100% with 10% increments.
