Analysts are mixed on Singapore Airlines’ (SIA) C6L prospects after the airline reported a sequential improvement on its earnings for the 3QFY2023 ended Dec 31, 2022.
On Feb 21, SIA saw 3QFY2023 earnings improve by 12.7% q-o-q to $628 million. Earnings for the 9MFY2023 came in at $1.56 billion, up from the 9MFY2021’s loss of $752 million.
UOBKH downgrades to ‘sell’; SIA’s core profitability likely to have peaked in the 3QFY2023
While most of the analysts are generally positive on the airline, UOB Kay Hian analyst Roy Chen has issued a downgrade on SIA with a “sell” call from “buy” previously. Chen has also lowered his target price estimate to $5.35 from $5.40 before.
The downgrade comes on SIA’s “stretched valuation”.
“SIA currently trades at 1.14x FY2024 P/B, 1.9 standard deviations (s.d.) above historical mean P/B of 0.97x before the pandemic,” he writes, advising investors to “take profit” on the stock.
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“Our new target price of $5.35 is based on 1.06x FY2024 P/B, or 1 s.d. above historical mean,” he adds.
Based on his estimates, SIA’s net profit is below his expectations, forming 27% of his forecast for the FY2023. The airline’s net profit for the 9MFY2023 also stood below Chen’s estimates at 67% of his FY2023 estimates.
The miss was due to a “significant” foreign exchange (forex) loss of $196.1 million from the 6.1% depreciation of the US dollar (USD) against the Singapore dollar (SGD) during the 3QFY2023, Chen writes. Excluding the forex losses, SIA’s profit for the 3QFY2023 would have been at $824 million, which will come in within his estimates albeit at the lower end of his forecasted range of $800 million to $1 billion.
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To Chen, SIA’s core profitability is likely to have peaked in the 3QFY2023.
“Going forward, pax volume should continue to recover, but the positive earnings impact of increasing pax volume may not negate the negative impacts from softening pax yields, declining cargo yields, and declining cargo volume,” he writes.
“Headline net profit, on the other hand, may still show some q-o-q improvement in 4QFY2023, as the 3QFY2023 headline profit figure was dragged by the significant one-off forex losses,” he adds.
Citi keeps ‘sell’ due to drag from Air India associate
Citi Research analyst Kaseedit Choonnawat is keeping his “sell” call on SIA with an unchanged target price of $5.16.
Choonnawat’s call comes despite the airline’s core profit for the 3QFY2023 coming “arguably in-line”. SIA’s 9MFY2023 results came within 90% of his full-year forecasts.
The analyst also notes that the airline’s guidance on pax have become shorter as the industry’s supply increases.
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“This is coinciding with surges in industry’s capacity on SIA’s key long-haul routes, Gulf airlines re-ramping Kangaroo operations, normalisation of SIA shares at Changi Airport where SIA flags that ‘competition is likely to intensify as airlines inject more capacity on international routes,’” notes the analyst.
“The latest European hotel industry’s revenue per available room (RevPAR) for the week of Feb 15, which we see as indirect indicators to travel spending, has been cooling off yet still above pre-Covid levels. We mathematically expect visible yield normalization from summer 2023 as supply returns,” he adds.
Noting the decline in the industry’s air freight yield to the teens on a quarter-to-date (qtd) basis, Choonnawat expects yield to now normalise 10% above pre-Covid-19 levels by the FY2025. This is given the increasing industry’s supply mix towards freighter which are more manageable versus belly space, he says.
“Resumptions of Chinese airlines’ long-haul capacity, especially those Westbound over Russian air-space, should accelerate effective supply resumption,” he adds. “The on-going shifts of Western’s consumption back to services from goods should continue to pressure demand, similar to ocean freight, where our latest visits to Vietnam reaffirms bearish near-term outlook.”
On SIA’s associate with Air India, the analyst says that the associate will likely pose a “short-to-mid-term drag on financials to SIA” but it is “correct” in the long-term, especially if SIA’s shareholders’ funding are “less of an issue”.
“Air India actually has options to acquire another 370 aircraft on top of 470 firm orders announced last week,” he notes.
“Our ‘sell’ thesis on SIA anchoring on Air India’s drags holds, global air freight yield continues to fall and seat supply on SIA’s key long-haul routes incrementally returns to 80%-100% of pre-Covid by summer 2023 – where we think [3QFY2023] quarterly earnings likely have peaked,” he adds.
“We see potentially sustained premiumization of SIA’s leisure traffic as key upside risks,” he continues.
In a separate report following SIA’s post-results briefing on Feb 22, Choonnawat says he sees “no visible reason” to change his “sell” call after key points were made.
During the briefing, SIA’s management said it expects a moderation in its passenger yield going into the summer of 2023 instead of a collapse. It adds that it sees strong bookings across all of its classes during the 4QFY2023 ending March, but that it is “too early to guide beyond”.
Further to its briefing, SIA also noted that the demand from China is “strong” with pre-Covid slots “grandfather” although “airlines still need to apply for flights on both origin and destination sides so that airports can prepare and scale up resources to serve,” says the analyst.
“SIA confirms that negative polymerase chain reaction (PCR) results are required for Chinese to board the home-bound flights which all carriers are required to enforce,” adds Choonnawat.
“[At its briefing, SIA adds that there is] still no change at this point to the $0.9 billion maximum SIA pro-rated capital injection required by March 2024 given firm orders are narrowbody centric i.e. 400 of 470 total, which has multiple financing options such as sales-and-leaseback,” he continues.
CGS-CIMB sees SIA’s share price moving higher in near term
CGS-CIMB Research analyst Raymond Yap has kept his “hold” call on SIA with a higher target price of $6.14 from $5.97 before as he sees the airline’s share price as likely to move higher in the near term.
Yap’s prediction is based on SIA possibly declaring a final dividend of 27 cents, assuming a 50% payout ratio and implying a total return of slightly over 10%.
“We retain ‘hold’ on valuation grounds as the robust fundamentals have already been reflected in the share price, and we are likely past peak earnings,” says Yap.
In his report, Yap, like the rest of his peers, see SIA’s quarterly earnings as likely to have peaked in the 3QFY2023.
“We expect SIA to report [a] patmi of $586 million in 4QFY2023, which is still very robust albeit below the near-all-time peak of $628 million in 3QFY2023, with lower q-o-q oil prices offsetting some of the normal seasonal demand moderation,” he writes.
The analyst also expects SIA’s operating metrics for its cargo segment to weaken at a faster rate with the 6% y-o-y fall in cargo yields in FY2023 potentially accelerating to a 20% decline in the FY2024.
SIA’s core profit for the 9MFY2023 outperformed Yap’s previous FY2023 expectations at 83% of his full-year estimates.
In this report, Yap has raised his core net profit forecast for the FY2023 by 17%. This is as he expects the current strong passenger demand fundamentals to carry over into 4QFY2023.
He has also upped his core net profit forecast for the FY2024 by 134%. “[This is] from a low base as we moderate the pace at which we expect passenger yields to decline, since competitor airlines are still gradually ramping up their network, partially offset by an acceleration in the cargo yield decline as container shipping freight rates have collapsed to pre-Covid levels.”
Similarly, he has raised his core net profit estimates for the FY2025 by 16% for the same reasons.
That said, Yap is forecasting a 47% y-o-y decline in FY2024’s core earnings per share (EPS) after pencilling-in an estimated $527 million share of loss from a proposed 25% stake in Air India.
DBS and OCBC keep ‘buy’
Analysts from DBS Group Research and OCBC Investment Research (OIR) are keeping their “buy” calls on SIA. DBS analysts Paul Yong and Jason Sum have kept their target price unchanged at $6.80 while OIR’s Chu Peng has upped her target price to $6.47 from $6.28 previously.
The higher target price factors in SIA’s “strong” 3QFY2023 results. Chu has also upped her estimates following the airline’s quarterly performance.
“While competition is likely to increase this year, management expects passenger yields to see a more gradual pace of normalization, as demand-supply dynamics remain favourable. Cargo revenue could be under pressure given softer demand, but yields stay elevated,” she writes.
To DBS’s Yong and Sum, SIA’s record 9MFY2023 net profit is “significantly above” their expectations.
The analysts note several positives on the carrier’s prospects, seeing that it has a “strong foothold” in Asia’s leading aviation hub.
“SIA has one of the most extensive networks among airlines in Asia, which allows the group to capture substantial transit traffic from neighbouring countries in the region,” write Yong and Sum.
“The group also generally enjoys stronger loyalty among consumers because of its stellar branding and service. SIA has a best-in-class balance sheet, which is not only advantageous in a rising interest rate environment, but also enabled the group to retain many of its pilots and aircraft despite the devastating impact of Covid-19,” they add. “Consequently, SIA was able to swiftly deploy capacity as borders reopened and gain market share from competitors in the region.”
China’s reopening will also help to accelerate SIA’s recovery, note Yong and Sum with the strong momentum for its passenger traffic likely to sustain.
“We expect the airline’s passenger volumes to climb back to 2019 levels in 2QFY2024 and hold the view that passenger yields should remain at elevated levels for some time (albeit moderating) on the back of revenge travel and measured capacity growth by competitors,” they write.
“We believe recessionary fears are overblown and the street is severely underestimating SIA’s earnings potential. We continue to have above consensus earnings projections and believe that SIA will continue to deliver positive surprises in the near-term to catalyse a re-rating,” they add.
On this, Yong and Sum have lifted SIA’s FY2023 and FY2024 earnings by 20.2% and 10.5% on better-than-expected results.
Shares in SIA closed 5 cents lower or 0.87% down at $5.72 on Feb 23.
