Despite the likely continued ticket pricing strength of the airline industry over the next two years, Citi Research analyst Kaseedit Choonnawat estimates that upside for Singapore Airlines (SIA) C6L will be limited as per its bull case estimate, as evident from the overall unit revenue (RASK) normalising to 19% above pre-Covid levels in FY2025 ending March 2025.
An elevated RASK is unlikely due to incremental supply resumptions in the industry.
With risks and rewards tilted to the downside, Choonawat has downgraded Singapore Airlines (SIA) to “sell” from “buy” with a revised target price of $6.54 from $6.41, reflecting forecast adjustments of 3% to 8% above street over FY2024 to FY2025.
The analyst cites that the downgrade is primarily driven by SIA’s raised P/B of 1.4x for FY2025 in relation to 9% core ROE following an approximate 30% share price increase over the past three months that shifts risks and rewards to the downside.
“We believe a potential for no change in demand guidance by the company in the near-term could lead to profit-taking. Airports Of Thailand and Cathay Pacific are preferred within the APAC aviation sector,” notes Choonawat.
Alongside the downgrade in call, the analyst has bumped up core earnings forecast for FY2024 by 28%, but expects a 7% decrease as earnings taper off in FY2025. This is in relation to the 4% to 6% higher passenger yield assumption of the group (23%/15% above pre-Covid over FY2024-FY2025, compared to 27% in FY2023). This is offset by higher unit cost assumptions
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A full redemption of MCB is expected, with revised forecasts implying 14% and 9% core ROE over FY2024 to FY2025.
“Our revised forecasts optimistically assume Air India associate breaking even in FY2024-FY2025 from $300 million of associate loss per annum expected earlier, indirectly deducing in strong earnings of Indigo and incremental consolidation of India aviation market,” opines Choonawat.
“The likely strength of demand and arguably earnings of FY2024 is appreciated by the market, in our view, following robust demand guidance in end-2023 hence shifting focus on FY2025 valuation,” says the analyst.
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The analyst also identifies that one key upside risk is a potential for ticket price reacceleration against the industry’s capacity recovery, but anecdotal evidence has been rare. Other risks include fuel price decline, improvements in European geopolitical situation, Air India turning significantly profitable and the market willing to reduce the risk-premium as the counter becomes a more direct proxy of Singapore’s tourism.
As at 5.25pm, shares in SIA are trading at 8 cents lower or 1.07% down at $7.38.
