CGS-CIMB has downgraded Singapore Airlines’ call to “hold” from its previous “add” rating with a lowered target price of $3.55, on the back of higher than expected losses and dashed hopes of a quick recovery. 

Last week, SIA reported losses of $1.12 billion in Q1, its largest quarterly loss on record. 

See: SIA plummets into $1.12 bil net loss in 1Q20/21 on continued aviation woes

Analyst Raymond Yap said CGS-CIMB reversed their “short-lived ‘add’ call back to a ‘hold’ rating” as the surge in global Covid-19 cases has put paid to hopes of a quick recovery.

The target price was lowered to $3.55 due to a “significant widening” of loss forecasts, which was significantly higher than the broker’s previous FY21F core net loss estimate of $720 million

Yap said SIA suffered “almost 100% drop in pax (passengers) carried" across the Full Service Carrier (FSC) and Low Cost Carrier (LCC) airlines due to Covid-19 lockdowns and border closures, but partially offset by a comfortable increase in cargo revenues and profits.

He noted cargo operations delivered a $332 million earnings before interest and taxes (EBIT), up almost 10-fold on account of higher cargo yields amid a rush of global shipments of personal protective equipment and pharmaceuticals.

Yap went on to say the core net loss forecasts for FY21-23F have been “widened significantly,” because previous assumptions on passenger traffic recovery look “increasingly improbable”.

This is in light of the still-worrying levels of Covid-19 infections in major markets for SIA such as Indonesia, India, Australia, Hong Kong and the US, and the reluctance of countries to open their borders prematurely. 

He earlier expected FY21 available seat kilometres (ASK) capacity to be about 45% of the baseline in FY20, with FY22 at 75% and FY23 at 90% of the baseline, but have now revised the ASK forecasts to 10%, 50% and 70% of the FY20 baseline in FY21, FY22 and FY23 respectively. 

Yap also expects long-haul travel on SIA mainline will likely take longer to recover than medium-haul travel, which in turn may take longer to recover than short-haul travel on SilkAir and Scoot. 

This is a major challenge for SIA, as the long-haul operations generate the biggest chunk of profits and employ the most expensive assets. 

Meanwhile, OCBC Investment Research has maintained its “hold” rating on the stock, but with a lowered target price of $3.50. 

Besides the larger than expected losses, OCBC analyst Chu Peng said SIA expects passenger capacity to reach less than 50% of its pre-Covid-19 levels by end of FY21 and sees international travel to take a longer-than-expected recovery trajectory. 

He expects with a prolonged Covid-19, “earnings visibility remains low in the near-tern and expect 2-3 years for recovery to pre-pandemic levels.”

In addition, both analysts also noted SIA’s $464 million in mark-to-market (MTM) losses on ineffective fuel hedges. Chu also cited the fact that SIA had recorded ineffective hedging losses of $710 million earlier. He said the group could potentially see further hedging losses in the coming quarters if travel demand and oil prices remain weak.

Furthermore, SIA is also undergoing an asset impairment review, and may book a $1 billion impairment on its 19-strong A380 fleet, as well as additional impairments on the values of older-generation planes.

As at 12.31pm, shares of SIA were trading at $3.24, down 7 cents and 2.11% lower than it’s last close of $3.31.