Citi Research analysts Kaseedit Choonawat, Arvind Sharma, Samuel Seow, Amy Han, Eric Lau and Satish B Sivakumar are keeping their “neutral” call on Singapore Airlines C6L (SIA) at an unchanged target price of $6.76 following the approved merger of its joint venture (JV) with Tata Sons, Vistara, and Air India.
The team’s target price is based on 1.25 times FY2025 price-to-book value (P/BV) against a 10.5% prospective core return on equity (ROE), which is in line with the historical trading relationship.
“Investors have been questioning how to consider Air India's potential value to SIA where [the] merger with Vistara is expected to be concluded on Nov 12 and implications from Qatar Airways (QR)' potential acquisition of a minority stake in Virgin Australia,” the team writes in its Sept 7 report.
Based on its estimates, the team forecasts Air India to break even in the FY2025 to FY2027 against its track record of losses in recent decades.
“Mathematically, we calculate an Air India merged entity could add around $1 per share to SIA’s fair-value should it deliver profitability per seat-shares in-line with Indigo at similar valuation multiples,” write the Citi analysts.
These estimates are based on the current US$22 billion ($28.7 billion) market cap of regional competitor, Indigo, as well as Air India having around 60% seat capacity of Indigo post-merger. The estimates also factor in the $1.24 billion investment required by SIA which the team notes “may not be sufficient”.
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The implied value of the merged Air India comes up to 37 cents per share in the team’s target price of $6.76 for SIA, says the team. The amount is calculated based on the combination of the $1.24 billion investment and $1.1 billion non-cash gain, which accounts for 5% of SIA’s FY2025 assets in total.
Meanwhile, the team understands that SIA and Qatar Airways are days away from signing a deal to buy up to 20% of Virgin Australia.
On this, they see Qatar Airways’ potential minority stake in Virgin Australia posting mid to low-single-digit downside risks to SIA’s overall yield during the mid-term, while upsides to SIA’s minority stake include dividend income and relatively lowered competition to the flag carrier’s connecting traffic in Australia.
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Currently, Qatar Airways operates up to 28 weekly flights to four major Australian cities. The airline makes up 3% of Australia's international seats compared to Emirates’ 7%, which operates up to 168 weekly flights.
“A possible scenario would be Qatar Airways leasing its widebodies to Virgin Australia to utilise reciprocal traffic rights as Qatar Aiways’ additional frequencies between Doha-Australia, assuming flights make financial sense, to potentially doubling Qatar Airwat’s international presence and narrowing gap to SIA.”
Presently, the team at Citi notes that bearish factors for SIA include sequential declining passenger yield into rising unit costs, while other airlines in Europe have pointed to supply-driven price softness in Asia. Qantas Group’s international unit revenue for the second half has also guided for a 7% to 10% y-o-y decline.
They write: “While we have been negative on SIA’s Kangaroo (Australia route) exposures primarily driven by industry’s capacity resumptions, we see Air India’s potentially narrowing losses/turning profitable as working positively against sequentially declining margins at SIA’s current form.”
Key downside risks noted by the Citi team for SIA include a weak macro outlook, as well as disappointing passenger demand, ticket and cargo pricing strength.
Conversely, upside risks include the successful restructuring of Air India, successful commercial collaborations with partner airlines that were deemed competitors including Asean flag carriers and Middle Eastern airlines, and lastly, stickiness of passengers’ willingness to pay ticket price premiums on SIA as a product leader.
As at 12.54 pm, shares in SIA are trading 2 cents higher or 0.32% up at $6.30.
