Analysts at DBS Group Research and Citi Research are keeping their respective “hold” and “neutral” calls at unchanged target prices of $6.50 and $6.76 respectively on Singapore Airlines C6L (SIA) following the company’s 1QFY2025 ended June results.
On the other hand, the analyst at CGS International has downgraded his call on the group to “reduce” from “hold” at a lowered target price of $5.88 from $6.78 previously.
For the period, SIA posted a net profit of $452 million, a 38.4% y-o-y decrease from the 1QFY2024’s $734 million.
The team at DBS notes that this represents 26% of their full-year core net profit estimate. “The group’s performance during the quarter was aligned with our expectations, given that we expect further deterioration in subsequent quarters.”
SIA’s 9.7% y-o-y increase also met the team’s expectations, but passenger yields for both the group’s full-service and low-cost carrier segments “fell short of expectations”, with SIA and Scoot experiencing around 6% declines, versus the team’s anticipated 4.5% decrease.
They continue: “The cargo segment, however, showed promising sequential improvements in yields and load factors. Despite facing inflationary pressures, SIA managed costs effectively during the period, reducing ex-fuel unit costs by 3.5% y-o-y, better than our projected 1% reduction.”
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On the 2.1% y-o-y overall rise in unit costs driven by the significant 8.1% increase in jet fuel prices, the team writes: “This combination of softer pricing and rising costs resulted in a sharp drop in operating margin to 10% in 1QFY2025, down from 11.8% in 4QFY2024 and 16.8% in 1QFY2024.”
Overall, the team notes a “fairly bleak” outlook for the rest of the year, with further y-o-y declines in passenger yields due to intense competition, particularly in the Asia Pacific (APAC) region despite air travel demand remaining resilient.
They add that European and North American airlines have seen a trend of prevalent fare discounting, which is “likely to impact” the APAC region due to softer consumer sentiment and stronger-than-anticipated capacity growth in the region.
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“Additionally, while the Red Sea attacks may boost air cargo demand, cargo yields are expected to continue their downward trend, albeit more gradually,” continues the team.
They also expect unit costs from airport operators and service providers to increase rates, such as in Sats’s recent contract renewal.
The team at DBS concludes: “Given SIA’s strong relative share price performance in 2024 year-to-date (ytd), we could see a negative share price reaction as the market is likely expecting a better set of results from the group.”
Meanwhile, Citi analysts Kaseedit Choonnawat, Amy Han and Eric Lau note that SIA has been on a declining trajectory on passenger pricing, at 12% above pre-Covid levels in June, from 14% in March and 20% before last December.
They also add that the group’s yield pressures are in-line with recent commentaries from peer airlines such as Qantas and Lufthansa, on the weakness from Asia regions as well as from implications of forward pricing curves noted by the team.
While Choonawat, Han and Lau note that the group’s cargo yields were smaller than those of North Asian China Airlines and Eva Airways, the analysts continue to see cross border e-commerce shipments from Asia as a potential upside to both volume and pricing.
To this end, the analysts prefer Sats within the Asean aviation sector over SIA, and Cathay Pacific as well as Eva Airways among APAC airlines.
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The Citi analysts believe investors could find SIA’s bull-case a challenge in the near-term as unit passenger pricing declines against unit costs inflation. The Air India-Vistara proposed merger could provide mid-term upside where regulatory approvals are still on-going, they add.
Key risks noted by the team at Citi include a weak macroeconomic situation, disappointing passenger demand, as well as ticket and cargo pricing strength.
Conversely, upside factors include the successful restructuring of Air India, leading to incremental associate income against the team’s assumption of a breakeven, successful commercial collaborations with partner airlines including Asean flag carriers and Middle Eastern airlines, and lastly, the stickiness of SIA’s passengers’ that are willing to pay ticket price premiums.
Finally, CGSI’s Raymond Yap downgrade on SIA comes on the understanding that the group’s cum-dividend share price of $6.97 will be adjusted down to $6.59 following its dividend per share (DPS) payout of 38 cents on Aug 1.
He adds in his July 31 report: “SIA’s 1QFY2025 profit after tax and minority interests (patmi) of $452 million missed our preview of $490 million due to lower-than-expected passenger and cargo yields, partially offset by lower cost of available seat kilometre.”
Yap’s reduced target price represents a 6% total return downside after including his forecast FY2025 DPS of 30 cents, based on a 56% payout ratio against his core net profit forecast.
He points to multiple potential de-rating catalysts, such as the ongoing slide in passenger yields, the topping out and moderation of cargo yields this quarter following the easing of congestion in the Port of Singapore last month, engine troubles for Scoot’s A320neo fleet continuing to impact operating efficiency and profitability and finally, the expectation of no significant dividends until May FY2025 when 4QFY2025 results are announced.
On a brighter note, upside factors noted by the CGSI analyst include stronger-than-expected passenger demand in the ongoing summer travel season and better-than-expected cargo yield strength in peak December period.
As at 11.53 am, shares in SIA are trading 7 cents lower or 10.0% down at $6.27.
