SIA shares drop following earnings miss and analysts' downgrades

For the three months to December 2023, the airline reported revenue of 8.5% q-o-q and 4.9% y-o-y to $5.082 million.

However, earnings of $659 million in the same period while up 4.9% y-o-y was down 6.8% q-o-q, no thanks to softer yields.

In its Feb 21 note, DBS Group Research says that 3QFY2024 results was "disappointing", given how the seasonally strong year-end peak travel season. 

Overall passenger load factors remained at an elevated level of 88.2% but passenger yields for both SIA and its low-cost unit Scoot declined more rapidly than anticipated, which negated lower fuel costs. 

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Looking ahead, SIA’s forward bookings remain strong, bolstered by the upcoming March school holidays and the Easter holiday season. 

SIA says capacity is expected to fully recover in the coming FY2025, up from around 90% of pre-pandemic levels in 3QFY2024. 

"However, sustained downward pressure on passenger yields amidst increasing competition and cost pressures are likely to impact the group’s profitability, reinforcing our thesis that the group’s earnings will peak this current FY2024," says DBS.

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"We anticipate a decline in SIA's share price, as the market appears to be in search of a stronger set of results, particularly in light of the stock's robust performance year-to-date," adds DBS.

In their Feb 22 follow-up note, analysts Jason Sum, Tabitha Foo and Paul Yong of DBS Group Research are of the view that SIA's valuations are "fair" at this juncture, given how its core earnings are seen to dip in the coming FY2025 and FY2026.

Regional peers, in contrast, have greater room for recovery, exhibit a superior earnings trajectory, and offer more compelling valuations, they note.

While keeping their "hold" call, they've cut their target price to $6.10 from $7, which is based on 5.0x EV/EBITDA (blended FY24/25F), which is 0.5 standard deviation above its five-year pre-pandemic average.

In his Feb 21 note, CGS International analyst Raymond Yap points out a key reason SIA's cargo business did not do as well as expected.

In its 3QFY2024, cargo yields were up just 2.8%. In contrast, the benchmark Baltic Exchange Air Freight Index (BEAFI), which tracks cargo yields between Hong Kong and Europe and US, was up 30% q-o-q.

SIA is projecting "robust" forward sales for the current 4QFY2024 and the coming 1QFY2025, with support from key events including the Singapore Airshow taking place now and the Taylor Swift concerts next month.

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"However, we think that these positives have been well reflected in its share price, and the street may have run ahead of what SIA can reasonably deliver," says Yap, who has downgraded his call from "add" to "hold", along with a target price of $7.30.

He notes that following his previous upgrade call to "add" made on Jan 9, SIA's share price has gained some 14.6%, exceeding his previous $6.91 target price.

His new target price of $7.30 is based on a calendar year (CY) 2024 P/BV multiple of 1.3 times, which broadly coincides with SIA’s peak P/BV trading multiple in mid-2023 when SIA’s share price also traded above $7.

In contrast, his previous target price of $6.91 was based on a CY2024 P/BV multiple of 1.2 times, or 2 standard deviations (s.d.) above the P/BV mean since 2011.

Yap is projecting SIA to pay a dividend of 38 cents, slightly reduced from 40 cents expected earlier, when it reports its full-year earnings in May.

This will give a forecast yield of 6.5%, providing near-term support to SIA shares.

Upside risks over the next six months include SIA sustaining higher-than-expected passenger load factor and passenger yields, lower-than-expected oil prices, and a higher-than-expected final dividend to be declared in May.

On the other hand, downside risks beyond the next six months include rising competition from the coming FY2025 onwards from other airlines that are picking up speed in their capacity restoration programmes.

Other such risks include potentially weaker air cargo markets as competition increases, and potentially higher jet fuel prices if OPEC+ (or the Organization of the Petroleum Exporting Countries) production controls become more effective than they have so far been.

OCBC Investment Research analyst Ada Lim has taken on a somewhat contrarian view by raising her fair value from $7.29 to $8, while keeping her "hold" call. Her new target price is due to a higher target P/B ratio of 1.24 times, in line with one s.d. above the rolling five-year average at the time of her report.

In her Feb 21 report, Lim notes that SIA is expected to post another record performance for the FY2023/2024 ending March 31 due to the robust travel demand and its sustained lead in capacity after the reopening of borders.

"Regional airlines have struggled with manpower shortages and other operational issues, which may allow SIA to enjoy higher for longer passenger yields vis-à-vis pre-Covid levels," she writes.

However, Lim is also careful to note that a recessionary outlook remains a "key overhang" for discretionary travel expenditure, while geopolitical tensions could pose further upside risks to oil prices and inflationary pressures.

That being said, she remains "confident" in SIA's brand proposition and product innovation. "In our view, SIA continues to hold long-term value in investors’ portfolios, although there could be some share price volatility in the near term ahead of SIA’s full-year results release."

The negative market reaction that followed SIA's results after the higher-than-expected operating expenses during the 3QFY2023/2024 seems unmerited, in Lim's view, who notes that the airline's topline growth remained "solid".

Overall, Lim is retaining her forecasts given that passenger yields will continue to come under pressure from increased competition and the expectation of softer air freight volume during a seasonally weaker 4Q while cargo yields remain on a downward trajectory.

Citi Research analysts Kaseedit Choonnawat, Amy Han and Eric Lau are keeping their "buy" call on SIA with an unchanged target price of $7.72 although they see downsides to their earnings estimates for the FY2025 to FY2026, which are above the consensus. This is due to higher-than-estimated ex-fuel costs, as indicated by SIA's management during its earnings briefing. 

"We reaffirm our view that SIA’s ticket prices are likely to surprise market positively into summer 2024, despite management’s conservativeness against our expectation of bullish guidance per positive 30-days catalyst watch. Our cargo assumptions, which we already expect to normalize in FY2025, may require reassessment given SIA’s recent discrepancies to industry peers," they write in their Feb 21 report.

Among the region's airlines, the analysts prefer Hong Kong-listed Cathay Pacific, Air China and Taiwan's Eva Airways. Within the Singapore aviation sector, SATS is a top pick.

UOB Kay Hian analyst Roy Chen, too, has cut his current year FY2024 and coming FY2025 earnings forecasts by 3.6% and 3.0% to $3.69 billion and $1.58 billion respectively, to reflect higher costs.

In his Feb 22 note, Chen points out that his $3.69 billion estimate for FY2024 includes the accounting gain of $1.11 billion from the Air India-Vistara merger.

If this line is excluded, FY2024 earnings would have $2.58 billion, implying a 4QFY2024 net profit of $475 million. 

He has kept his FY2026 net profit forecast for SIA remains unchanged at $1.09 billion. 

While Chen has kept his "hold" call, he has lowered his target price to $6.28 from $6.80, based on a lower P/B valuation peg to take into account weaker market sentiment.

From 1.26 times previously (1 s.d. above the historical mean), Chen's revised P/B-based valuation is 1.18 times FY2025 or 0.5 s.d. above the long-term historical mean P/B of 1.09 times.

According to Chen, the +0.5 s.d. of his new P/B peg reflects his appreciation of SIA’s outstanding track record demonstrated during the pandemic. 

In addition, even with the 3QFY2024 earnings miss, SIA is set to report a record level of earnings for the full year and can at least sustain the same 28 cents per share final dividend as last year.

This implies that SIA will pay a total FY2024 dividend of at least 38 cents, which translates into a yield of more than 6% based on Chen's new target price of $6.28.

PhillipCapital analyst Peggy Mak has maintained her "reduce" call with a higher target price of $5.91 from $5.45 previously as she rolls her estimates over to SIA's new FY. Her new target price is still based on a 1 times the airline's FY2025 P/B. "This factors in a projected 31% decline in net profit for FY2025," she says.

In her Feb 22 report, Mak noted only negatives, which include escalating costs, revenue which grew slower than the surge in passenger volume and lower operating profit due to a drop in Scoot's operating profit and lower cargo revenue. The net profit gain was also due to several one-offs, while the airline's debt rose after a partial redemption of its mandatory convertible bonds (MCBs).

"Yields are expected to fall further as airfares continue to normalize. Airlines are expected to lower fares to fill seats as travel demand eases. On the other hand, costs are expected to rise with more flight restorations and more new airlines launching services," says Mak. That said, she has raised her net profit estimates for the FY2024 by 10.5% as SIA's passenger load factors are coming in above her earlier assumptions.

Moomoo Singapore analyst Isaac Lim has given SIA a conviction level of "good" with a target price of $7.30.

"SIA looks set to continue its outperformance, especially with the latest earnings announcement. The main factors contributing to SIA's continued outperformance would be the complete lift of the Vaccinated Travel Framework (VTF).

"Investors can expect to see greater passenger loads that contribute to profitability going forward. And investors can see a preview of this with the latest 3Q announcement that passenger capacity is now close to pre-pandemic levels," says Lim in his report dated Feb 21.

"Further, with more partners onboard the codeshare scheme, this would allow SIA to sell more of their seats to passengers from other regions as well. SIA is also pushing to explore outside its traditional line of business with its expanded Krisflyer ecosphere," he adds.

That said, Lim remains cautious as he sees headwinds remaining for the airline. These include macroeconomic uncertainties and high oil prices, as well as escalating geopolitical tensions, inflationary cost pressures and unforeseen Black Swan events such as the Covid-19 pandemic. Furthermore, oil prices are unlikely to come down to its lows seen in 2023 anytime soon due to persistent inflation. 

"A shortened hedging cycle would also mean that should air travel continue picking up, SIA will possibly have trouble getting fuel prices at a better hedge," he says.

In his technical analysis, Lim expects SIA's share price to bounce back towards the $7.30 resistance level as long as its price holds above the near-term support of $6.62.

"Technical indicators are bullish for now with the price holding above long-term 55-day moving average (MA). The moving average convergence/divergence (MACD) indicator is holding above 0, showing a strong buildup in bullish momentum as well. Alternatively, a weekly candlestick close back below $6.62 will see [SIA's share] price do a deeper pullback towards the $6.35 support," he adds.

Shares in SIA closed 70 cents lower or 9.5% down at $6.67 on Feb 21.