CGS-CIMB Research analyst Raymond Yap has downgraded Singapore Airlines (SIA) to “hold” from “add” with a higher target price of $6 from $4.90 previously.

The downgrade, according to Yap, is due to the rising optimism that’s been priced into SIA’s shares.

SIA’s share price has rallied sharply in recent weeks due to investors’ optimism on the rollout of the Covid-19 vaccines. Investors are also hopeful on the airline that global travel may resume sooner than later.

SIA’s share price also rose on March 14 upon the news that Singapore and Australia are working to open an all-purpose travel bubble by July 2021.

SEE:Singapore Airlines trials pre-departure Covid-19 tests to revive travel

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In his report dated March 18, shares in SIA closed at $5.71, which is 11% shy of the airline’s high of $6.42 on Jan 2, 2020, right before the Covid-19 outbreak.

Yap has also identified the rising Brent crude oil prices as another positive for the airline.

“While higher oil prices are usually negative for SIA under normal operating conditions, SIA had over-hedged its jet fuel requirements for FY2021 and FY2022, hence SIA will book realised mark-to-market (MTM) profits in its 4QFY2021 profit and loss (P&L) from its fuel derivatives that mature in 4QFY2021, as the derivative strike prices of around US$60 ($80.54)/barrel are below the current Brent oil price of US$67-68/barrel,” he writes.

“For the not-yet-matured fuel derivatives for FY2022-FY2025, we expect SIA to book MTM gains into its FY21F B/S reserves with respect to the actual hedges against its expected future jet fuel consumption, and MTM profits on its 4QFY2021 P&L with respect to the over-hedged FY2022 position.”

As a result of that, Yap says he has raised his FY2022 adjusted book value per share (BVPS) by 9% to account for fuel derivative MTM gains reflecting the current forward average Brent prices of US$65/barrel for FY2022.

In addition to that, Yap has increased his target price-to-book value (P/BV) to 1.06 times from 0.94 times for FY2022 to “reflect investors’ willingness to pay for recovery plays”.

“This takes our new target price to $6, which is only 6.5% below the high of S$6.42 on Jan 2, 2020 (adjusted retrospectively for the May 2020 rights issue), prior to the outbreak of the pandemic. This reflects SIA’s strong financial position, unwritten by support from Temasek,” he writes.

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“Upside risks include a potential quarterly profit for SIA in 4QFY2021 due to MTM gains, very strong cargo demand in 4QFY2021 due to the Lunar New Year rush, and likely meaningful reopening of borders from 3QFY2022,” he adds.

“However, beyond the MTM gains, the long road to full demand recovery may temper investors’ expectations and pose downside risks to the share price.”

As at 12.50pm, shares in SIA are trading 1 cent lower or 0.2% down at $5.70.