As I have written about the discrepancy between inflows into Singaporean public assets, reported earnings, and then the amount they claim as assets under management, the question of how to reconcile these divergent numbers arises. There are numerous reasons for the difference between earnings, inflows, and assets under management but a recent case exemplifies the difference perfectly.
Singapore Airlines recently sold its 49% stake in Virgin Atlantic to Delta Airlines. A summary article of the deal from Bloomberg News reports the following:
“Delta will buy the 49 percent shareholding for $360 million, according to a stock exchange filling late yesterday. Singapore Air will book an S$322 million ($264 million) gain from the sale, after accounting for a writedown in its investment in the U.K. carrier controlled by billionaire Richard Branson…Singapore Air bought the stake for S$1.65 billion, Germaine Shen, a spokeswoman, said by e-mail.”
To summarize the article: Singapore Airlines buys its 49% stake in Virgin Atlantic for $1.65 billion SGD, sells it for $360 million, and books a profit of $322 million SGD. Only through extremely shady accounting can a company buy an asset for $1.65 billion and sell it for a $1.3 billion less but record a $322 million profit. Let’s explain how this is possible.
Because Virgin Atlantic is a private company, its shares are not publicly traded on an exchange and provide no public record to value the stake. Singapore Airlines therefore, marked the value of its Virgin Atlantic holding on its balance sheet based upon what it believed it could sell the shares for on the open market. So in the most technical of ways, Singapore Airlines is completely within its accounting rights to book a profit on this transaction.
However, a closer look reveals some very disturbing trends and patterns. First, to book a profit of $322 million SGD on a sale of $360 million, Singapore Airline implicitly valued the Virgin Atlantic stake at $38 million SGD. This means that Singapore Airlines was valuing its Virgin stake at 98% less than what is paid for it. Booking “profits” like this eventually cause a firm to go bankrupt.
Second, as has been pointed out by Muddy Waters Research in the Olam fight, recording large amounts of “accounting” profits and cash losses should cause real concern for investors. If “accounting” profits are growing fast or are a large portion of total profits, this should raise a red flag to investors. As I have noted previously about Singapore, Inc. public balance sheet, given the rapid growth in “unlisted assets” this should cause everyone some real concern. In the absence of “unlisted asset” growth, Singapore, Inc. returns are abysmal. This is the hallmark of a company trying to stay afloat not a prosperous company enjoying strong returns.
Third, this further harms the reputation of Singapore companies and their overseas adventures. At the same time that Singapore Air was buying a part of Virgin Atlantic, it was buying a part of Air New Zealand which it eventually wrote down to near zero. Given the range of international investments which have lost money, it should concern investors and citizens that the only place Singapore seems to be able to make money, is in Singapore.
Fourth, the baseline price used by Singapore Air is extremely suspect. The $38 million SGD baseline for 49% of Virgin Atlantic used by Singapore is for an airline with $5.4 billion SGD in revenue and a $158 million SGD operating loss in 2012. Valuing the 49% stake of a $5.4 billion SGD at $38 million after a difficult year appears designed to provide the basis for an accounting profit. In other words, Singapore Air has every incentive to undervalue its Virgin Atlantic stake to record a “profit” rather than accurately valuing the company.
This continued pattern of suspect accounting and returns at Temasek linked companies should provide serious cause for concern to investor and citizens alike. With “profits” like that, companies eventually go out of business.