UOB Kay Hian analyst Roy Chen is keeping “market weight” on the Singapore aviation sector as air traffic data at Changi Airport and operating data reported by Singapore Airlines (SIA) exceeded his expectations.
“While the paces of recovery in the flight activities and the passenger capacity reactivation were broadly in line, surprise mainly came from the passenger volume,” Chen writes in his April 25 report.
In March, passenger volume for March rose 62.2% m-o-m to 1.14 million, which stood 19.2% of its pre-Covid-19 levels in January 2020.
Singapore Airlines (SIA) saw its passenger load rising 61.2% m-o-m in March on the back of a 15.7% m-o-m increase in passenger capacity and a significant 15.4% percentage point increase m-o-m in its passenger load factor.
The higher-than-expected figures came in even before the positive impacts from the relaxing of border measures kicked in, he notes.
Pre-departure tests will no longer be required for fully vaccinated travellers and children aged 12 and below to enter Singapore from April 26 onwards, which will further ease the entry process into the country.
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In addition, a press release by the Civil Aviation Authority of Singapore (CAAS) dated April 18 has guided that Singapore is on track to achieve its goal to restore over 50% of its pre-Covid-19 air travel passenger volume in 2022. Air passenger traffic in Singapore had already reached 31% of its pre-Covid-19 levels in the week ending April. This is compared to the 19.2% levels for the month of March, by Chen’s estimates.
SIA had also guided that it would raise its passenger capacity to 61% of its pre-Covid-19 levels by May.
To this end, Chen has raised his earnings estimates for the three counters that are proxies to the Singapore aviation sector, SIA, SATS and SIA Engineering Company (SIAEC) for the FY2022 to FY2024.
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The forecasts were made to reflect the potentially steeper recovery trajectory, he says.
For SIA, Chen has revised his earnings estimates to a loss of $973 million for the FY2022 from a $1.05 billion loss previously; earnings of $420 million for the FY2023 from a loss of $28 million before; and earnings of $492 million in the FY2024 from earnings of $338 million before.
For SATS, Chen has revised his earnings estimates to $56 million for the FY2022 (from $44 million), $109 million for the FY2023 (from $86 million) and $182 million for the FY2024 (from $159 million).
The analyst has also upped his estimates for SIAEC, with an unchanged earnings forecast of $68 million for the FY2022, a higher estimate of $103 million for the FY2023 (from $92 million) and $143 million in earnings for the FY2024 (from $133 million).
Chen’s forecast for the FY2025, however, are “lightly touched” as the “stronger-than-expected recovery in the near horizon does not necessarily lead to higher longer-term earnings potential”.
“We are still looking at FY2025 as the year for the sector to see a full recovery, as some major markets in Northeast Asia (particularly China) are expected to lag behind in the trend of global opening-up,” he says.
In his report, Chen has kept his “buy” call on SATS and SIAEC and “hold” on SIA. He has also upped his higher target price estimates to $4.85 on SATS from $4.65; $2.90 on SIAEC from $2.80; and $4.85 on SIA from $4.80.
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SIAEC and SATS are also Chen’s preferred proxies to ride the recovery in the aviation sector.
“SIAEC and SATS are trading at 15.9x and 18.7x FY2025 (normalised year) P/E, standing at 1.9 standard deviation and 0.4 standard deviation below their FY2014-2019 (pre-Covid-19 years) average P/E of 23.2x and 19.9x, respectively,” he says.
“Despite possible positive earnings surprise for SIA, we maintain our case that the significant and potentially highly dilutive mandatory convertible bonds (MCB) have to be redeemed first, before SIA’s earnings recovery can deliver more meaningful valuation accretion to its common shareholders… SIA is currently trading at 1.47x FY23F P/B, an unprecedentedly high level or 4.0 standard deviation above its historical average P/B of 0.79x,” he adds.
Shares in SATS, SIAEC and SIA closed at $4.60, $2.71 and $5.50 respectively on April 26.
