CGS-CIMB Research analyst Raymond Yap has upgraded Singapore Airlines C6L (SIA) to “add” from “reduce” as he expects to see strong results from the airline for the 2HFY2024 ending March 31.
Yap has also raised his target price estimate to $6.91 from $5.47 as he sees re-rating catalysts from strong passenger and cargo demand in the second half of the airline’s financial year (FY).
The analyst is expecting SIA to deliver patmi of $800 million for the 3QFY2024. The airline will release its business update for the quarter on Feb 20.
Consequently, his patmi for the 2HFY2024 is forecasted to be at $1.5 billion, which is slightly better than the airline’s 1HFY2024 patmi of $1.44 billion and its 2HFY2023 patmi of $1.2 billion.
“The strong 3QFY2024 performance would likely be driven by the continuing strong passenger airline passenger load factor (PLF) of 87% - 88% in October - November 2023 (we expect PLF to rise to [around] 90% in December 2023 from the year-end holiday travel peak), and which we think will likely keep yields elevated in 3QFY2024,” says Yap in his Jan 9 report.
“What surprised us positively was SIA’s strong cargo performance in the closing months of 2023, with average monthly freight tonne kilometres (FTK) in October - November 2023 higher by 6% against the monthly average in July - September 2023 and the October - November 2023 cargo load factor (CLF) also 3.4 percentage points higher versus July - September 2023,” he adds.
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The analyst expects SIA’s CLF to rise to 59% during the December 2023 seasonal peak, representing a 4.7% increase y-o-y, due to robust e-commerce trade between China and Europe and China and the US.
“The Baltic Exchange Air Freight Index, representing cargo yields, rose an average of 30% in October - December 2023 (versus July - September 2023) due to the higher demand, albeit still lower on a y-o-y basis,” he continues, noting that the disruptions in container shipping on the Red Sea/Suez Canal routes as a result of the Houthi rebel attacks may benefit air freight demand.
In addition, lower jet fuel prices, which fell from a recent peak of US$128 ($170.47) per barrel in mid-September 2023 to US$100 per barrel currently, could help SIA’s results.
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Yap estimates that the airline’s all-in jet fuel price for the 3QFY2024 may still increase to US$114 per barrel from the US$98 per barrel during the 2QFY2024 assuming that there is a one-month contractual price lag compared to spot prices. This, however, is tipped to fall to US$100 per barrel in the 4QFY2024 should current spot prices remain at current levels this quarter.
Other factors in SIA’s favour include its Hong Kong competitor Cathay Pacific, who is said to be struggling to restore its capacities. According to several media reports, the airline is still seeing a shortage of pilots, which has forced it to cancel flights in December 2023 and in February 2024 for the Lunar New Year.
Final dividend expectations
For the FY2024, Yap expects SIA to declare a bumper final dividend per share (DPS) of 40 cents in addition to the 10 cents interim dividend declared in November 2023. This will take the airline’s dividend payout for the FY2024 to 53%, similar to FY2023’s 58% yield.
The 40-cent final dividend forecast implies a yield of 6.2% which is “very good” for a six-month holding period, says Yap.
The analyst has also raised his core earnings per share (EPS) estimates for the FY2024 to Fy2026 by 48% to 86% due to stronger cargo expectations, higher passenger demand for SIA and lower jet price fuel forecasts.
As at 12.39pm, shares in SIA are trading 2 cents higher or 0.31% up at $6.45.
