OCBC Investment Research’s Ada Lim has downgraded her call on Singapore Airlines C6L (SIA) from “buy” to “hold” at an unchanged fair value of $6.84.
“We think that SIA is nearing the end of the runway for exceptionalism, given that passenger yields are likely to have peaked and are on a moderating trajectory as other airlines progressively return capacity to the market, especially in the region,” writes Lim in her Sept 18 report.
The analyst notes since Aug 5, SIA’s share price has retraced 10.8%, after correcting close to 15% ex-dividend in its post-1QFY2025 ended June business update.
She continues: “To recap, SIA reported a 5.3% y-o-y increase in 1QFY2025 group revenue to $4.7 billion.”
However, the group’s expenditure outpaced revenue growth, up 14% y-o-y to $4.2 billion. Fuel costs were the main detractor of margin performance, rising 30.1% y-o-y due to higher volume uplift, higher fuel prices, and lower hedging gains.
With this, operating profit and net profit moderated 37.7% y-o-y and 38.5% y-o-y to $470.2 million and $451.7 million, respectively.
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While SIA has guided for travel demand to remain healthy in the coming months, it continues to caution that passenger yields will moderate as more capacity enters the market, notwithstanding delays in aircraft delivery and longer maintenance turn times due to supply chain disruptions.
In August, group passenger load factors (PLF) tapered off to 85.7%, down 2.5 percentage points (ppts) y-o-y.
SIA’s low-cost carrier, Scoot saw a steeper PLF decline of 3.3 ppts y-o-y as compared to flag carrier SIA’s 2.1 ppts y-o-y.
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Cargo load factors, on the other hand, gained 4.9 ppts y-o-y to 56.1% from lingering effects birthed by the Red Sea crisis and port congestion.
On the group’s approved Vistara merger with Air India, Lim sees the need for SIA to invest further before profitability can be achieved for the loss-making Indian flag carrier.
The group will invest a further INR20.6 billion ($318 million) for a 25.1% direct stake in the enlarged entity, with a possibility for further capital injections for up to INR50.2 billion.
“The merger will strengthen SIA’s presence in India, a rapidly growing aviation market supported by a strong economy, a rising middle class, and a potential consumption upgrade story,” writes Lim.
Currently, SIA is trading at a forward 12-month price-to-book value ratio (P/BV) of 1.3 times, which is close to 1 standard deviation (s.d.) above its five-year historical average.
The airline is also offering a forward 12-month dividend yield of 4.7%.
Lim concludes: “While this is around 1.4 s.d. above its five-year historical average, it pales in comparison to Singapore banks and selected S-REITs.”
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Potential catalysts noted by her include a stronger-than-expected recovery in capacity, the group’s rapid network growth to capture demand, especially in the Asia Pacific region and lastly, favourable fluctuations in oil prices.
Conversely, investment risks include a significant further weakening in cargo demand, increased competition as other airlines ramp up on international capacity and a steep moderation in air travel demand and prices.
As at 5.00 pm, shares in SIA are trading flat at $6.60.
