Following the release of Singapore Airlines C6L ’s (SIA) operating data for December 2023, UOB Kay Hian analyst Roy Chen is maintaining his “hold” call on the company with an unchanged target price of $6.80.
In his Jan 16 note, Chen forecasts the company’s 3QFY2024 ending June 30 earnings to have a “good chance” of beating the previous quarterly record of $734 million seen in 1QFY2024.
The analyst’s target price is based on 1.6 times FY2025 price-to-books ratio (P/B), and is pegged to 1 standard deviation (s.d.) above SIA’s long-term historical mean of 1.08 times.
“The +1 s.d. peg reflects our recognition for SIA’s outstanding operation track record demonstrated during the pandemic crisis and the likely improved long-term outlook given Singapore’s new visa-free arrangement with China,” explains Chen.
December 2023 highlights
For the month, SIA’s holiday season fuelled-passenger (pax) load rose 9.8% m-o-m, reaching 98% of pre-pandemic levels, while pax load factor improved 1.6 percentage points (ppts) m-o-m to 89.4%, beating pre-pandemic December 2019’s 87.6%.
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Likewise, pax capacity rose to 92.6% of pre-pandemic levels, slightly above the company’s previous guidance of a 92% recovery by December 2023.
Meanwhile, cargo load for the month dipped 0.9% y-o-y, which fell short of Chen’s expectations.
He writes: “SIA’s cargo load (measured by freight tonne-kilometre) dropped 0.9% y-o-y or 6.5% m-o-m) while we were expecting a mild growth. The slight miss seemed attributable to the average shorter distance travelled by cargo shipments in December 23 than a year ago, since actual freight carried rose 4.3% y-o-y in weight.”
At the same time, cargo capacity recovered to 91.4% of pre-pandemic levels, driven by the recovery of bellyhold capacity, while cargo load factor dipped 5.3 ppts to 52.6%, 6.5 ppts below December 2019’s 59.1%.
In December 2023, SIA also resumed its services to Xiamen, China, and its passenger network now covers 121 destinations, compared with 137 pre-pandemic.
Tailwinds
According to data from independent global supply chain consultant Drewry, global average air freight rates rebounded in the past three months from US$3.58 ($7.19)/kg in September 23 to US$5.28/kg in December 2023, representing a 47% increase, while 4Q2023 or SIA’s 3QFY2024’s numbers averaged at US$4.47/kg, a 25% increase over 3Q2023’s US$3.58/kg.
Chen adds that according to the Baltic Exchange Air Freight Index, air freight rates from Hong Kong to Europe and from Hong Kong to North America rebounded 44% and 45% respectively, between September 2023 and December 2023.
“The rebound in air freight rates were believed to be driven by growing cross-border e-commerce demand amid a seasonally strong 4Q2023. We are lacking reliable data tracking air freight rates in Singapore, but given Singapore’s transhipment hub status for air cargo, we remain hopeful that SIA may also see some moderate strength in cargo yields in 3QFY2024,” explains the analyst.
Meanwhile, jet fuel price has come off from its peak, as data from S&P Global notes that the global jet fuel price index was in a largely declining trend throughout 4Q2023.
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Chen continues: “The latest reading of 298 as of January 12 represents a 19.5% decline from the peak of 370 seen in mid-September 23. The index averaged at 316 in 4Q2023, largely comparable to 3Q2023’s average of 324.”
The analyst also points to the recent Red Sea crisis as a possible driving force behind SIA’s seasonally-weak air cargo in 1Q2024, or SIA’s 4QFY2023.
He writes: “A possible diversion of more time-sensitive cargo from ocean freight to air freight due to the ongoing crisis at the Red Sea may help support airlines’ cargo load in the seasonally weak 1Q2024. However, given the still fluid situation, we have yet to incorporate any earnings impact from the possible increment in cargo volume.”
Forecast
Given the updated operating data from SIA and after factoring in potential stronger-than-expected q-o-q rebound in the company’s 3QF20Y24 air cargo yields, Chen has updated his 3QFY2024 net profit guidance for SIA to $670 million to $810 million, an increase from his previous guided range of $650 million to $770 million.
“Note that the mid-point of our updated guidance range of $740 million is already higher than SIA’s quarterly historical high of $734 million in 1QFY2024,” notes the analyst.
Key factors which could cause variance to Chen’s forecast include SIA’s cost management efficiency, the lack of sufficiently accurate data to track the company’s pax yield, and its high operating leverage, which is highly sensitive to the two preceding factors.
The analyst believes that SIA can at least sustain the 38 cents dividend payout in FY2024, which is the same level as FY2023, and has the flexibility to pay out more.
However, Chen adds that the strong dividends in these one to two years are “unlikely sustainable” as he expects SIA’s earnings to moderate in the next few years, driven by competition.
Meanwhile, key risks noted by the analyst include the weaker-than-expected macroeconomic environment dampening air travel and air cargo demand, and the faster-than-expected catchup of competition.
As at 3.41 pm, shares in SIA are trading flat at $6.53 on Jan 16.
