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Analysts from DBS, OCBC and UOB Kay Hian increase their TPs as SIA outperforms 1Q expectations

Bryan Wu
Bryan Wu8/2/2022 03:28 PM GMT+08  • 6 min read
Analysts from DBS, OCBC and UOB Kay Hian increase their TPs as SIA outperforms 1Q expectations
SIA reversed into the black in the 1QFY2023 ended June with a net profit of $370.4 million
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Analysts from DBS Group Research, OCBC Investment Research and UOB Kay Hian have increased their target prices for Singapore Airlines (SIA) to $6.60, $5.84 and $5.18 from $6.20, $5.57 and $4.88 respectively, with DBS maintaining its “buy” call and OCBC and UOB each maintaining their “hold” recommendations.

Citi Research has also kept its "neutral" recommendation with an unchanged target price of $5.79.

The analysts’ reports come after SIA reversed into the black in the 1QFY2023 ended June with a net profit of $370.4 million.

DBS analysts Paul Yong and Jason Sum believe that SIA is “emerging victoriously” from the air traffic standstill experienced at the height of Covid-19 and that the company’s recovery in passenger volumes should “outpace” that of its peers in the region.

“SIA’s international passenger traffic has been recovering at a faster clip than its peers since Singapore launched its first Vaccinated Travel Lane (VTL) in September 2021. We expect this trend to persist and envisage the group’s passenger traffic hitting 81% and 102% of 2019 levels by end FY2023 and FY2024 respectively, supported by Singapore’s new Vaccinated Travel Framework and the synchronised reopening of borders in the region and other key markets,” they write.

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OCBC analyst Chu Peng says SIA’s 1QFY2023 performance, which benefited from the “boost” in robust air travel demand despite a decrease in air cargo traffic, stood above her expectations for her FY2023 estimate.

The analyst has also revised her earnings estimates to “reflect a stronger recovery” as SIA had indicated that it expects demand to remain strong with forward sales staying buoyant for the next three months up to October.

While Chu remains optimistic on the airline’s prospects, she sees that a large proportion of the positive outlook has been priced into SIA’s current share price levels.

“We see downside risks as competitors ramping up capacity which could weigh on SIA’s yields, together with a potential slow down in cargo demand and recessionary risk in 2023,” she writes.

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SIA’s 1QFY2023 results were also above UOB Kay Hian analyst Roy Chen’s expectations, making up 27% of his full-year forecast for the company, with its operating profit of $556 million marking the second-highest quarterly profit in SIA’s history.

“The upbeat 1QFY2023 earnings performance was mainly attributable to the steeper-than-expected pax volume recovery and strong pax yields, with their positive impact further amplified by SIA’s high operating leverage. SIA also benefited from a favourable fuel hedge gain of $202 million (pre-tax) in 1QFY2023. Excluding the fuel hedge gain, SIA’s 1QFY2023 net profit was still a positive $202 million, versus the $303 million net loss a quarter ago,” he says.

With these results, UOB Kay Hian has raised its FY2023 net profit forecast from $1.35 billion previously to $1.85 billion, a level “not seen in the past decade”, notes Chen.

He adds that SIA’s operating cash surplus and balance sheet strength is improving, with its operating cash surplus rising to $1.48 billion in 1QFY2023 from $502 million in 4QFY2022, which helped strengthen SIA’s balance sheet. “Even with all its mandatory convertible bonds (MCBs) treated as debt, SIA’s net gearing would be near 50% as at end-1QFY2023 by our estimate, down from 63% a quarter ago,” Chen writes.

DBS’s Yong and Sum say that “favourable supply-demand dynamics” are underpinning healthy passenger and cargo yields, justifying their above consensus earnings estimates as they expect SIA’s passenger volumes to “normalise at a faster rate” and assume higher passenger and cargo yields.

Yong and Sum have raised their net profit estimates for the FY2023 and FY2024 by 135.2% and 56.3% respectively to $1.54 billion and $1.70 billion.

“Colossal pent-up travel demand and the gradual restoration of passenger capacity will support passenger yields. Meanwhile, cargo yields should also remain high due to prolonged widespread supply chain disruptions,” they write, adding that they believe SIA’s current valuation does not “adequately reflect” its brighter earnings prospects.

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The airline is currently priced at 5.7x EV/ebitda for FY2023, consistent with its 3-year average prior to the pandemic but at a discount to regional peers. The DBS analysts believe that its relatively promising recovery trajectory and medium-term outlook justify a multiple above its peers.

However, Yong and Sum foresee that SIA’s earnings growth in FY2024 will be constrained by a steep increase in fuel costs given the decline in SIA’s fuel hedging ratio from 2QFY2024.

UOB Kay Hian’s Chen cautions that SIA’s current level of profitability should not be “taken as the norm”.

After the exceptionally strong FY2023, he, too, expects SIA’s profitability to trend downwards in FY2024 to FY2025 as its currently favourable fuel hedge position ends in 1QFY2024, passenger yields are driven down to more “normalised levels” as other airlines add and restore capacity and cargo yields gradually return to normalised levels as supply chain issues are resolved.

“Air travel recovery is also likely to slow down beyond FY2023 if China does not open up or opens up at a very slow pace. We expect SIA’s net profit to see two consecutive years of decline in FY2024 (- 26% y-o-y) and FY2025 (-30% y-o-y), before stablising at a more normalised level of net profit of $963m in FY2025,” says Chen.

Like his peers, Citi analyst Kaseedit Choonnawat sees a "clear upside" to his estimates for the FY2023 as SIA's profits have already reached 81% of his full-year forecast.

"Nonetheless, we question the sustainability in pricing power as non-SIA airlines are returning to Changi Airport as strong demand naturally attracts capacity where Changi is arguably not a slot-constrained airport even during pre-Covid," he writes in his report dated July 28.

In a previous report dated May 23, Choonnawat had upgraded his call on SIA to "neutral" with the assumption that the airline will call back all its outstanding MCBs in FY2023, in line with company guidance on its limited need to hold a large cash balance.

"Assuming SIA delivers $1.5 billion core profits in FY2023 (roughly annualizing 1QFY2023 profits) rather than in FY2024 per our current forecasts, (highest since FY2008), MCB fully redeemed core return on equity (ROE) would come to 11%-12% where the market historically paid [around] 1.3x P/BV," the analyst notes.

"At current 1.3x FY2023 P.BV, we believe the market is correctly pricing SIA ahead of consensus and we do not see significant upside to the share price at this point unless SIA’s annual earnings exceed $2 billion," he adds.

As at 2.48pm, shares in SIA were trading 1 cent or 0.18% down at $5.41.

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