CGS-CIMB Research analyst Raymond Yap has kept a “hold” rating on Singapore Airlines (SIA) as he sees the airline’s high airfares, elevated market share and strong demand to be offset by the risks of high oil prices.

In addition, Yap has lowered his target price of $5.75 from $5.92 previously, after cutting his earnings per share (EPS) estimates for the FY2023 to FY2024 ending March and applying a lower FY2023 P/BV of 0.95x, which is SIA’s mean since 2011.

The lowered EPS estimates were due to the analyst’s higher price assumptions for spot jet fuel, from US$120 ($167.15) per barrel to US$135 a barrel for the FY2023, and from US$95 per barrel to US$110 per barrel for the FY2024.

“We have also assumed higher yields to partially compensate for the higher fuel cost assumptions,” Yap writes in his June 13 report.

Overseas discretionary leisure travel could suffer

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In light of the high global inflation rates from higher food and fuel prices, along with higher global interest rates eating into consumers’ spending power, the analyst posits that overseas discretionary leisure travel could suffer in the future.

With a global recession in the future a rising possibility, compounded by the event that consumer spending possibly falling, air cargo demand may also decline as well.

“As SIA’s competitors ramp up their capacity deployment in the future, SIA’s heightened market share could fall back down to 2019 averages,” says Yap. “This may cause the current high airfares to moderate, even if jet fuel price levels remain elevated.”

While SIA is 40% hedged at Brent price of US$60 per barrel until June 2023, Brent is already at US$125. Furthermore, the airline is exposed to the jet fuel crack spread, which has widened from US$2 per barrel a year ago to US$38 per barrel now.

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Nevertheless, the analyst sees that SIA is in a very strong revenue position as it had kept virtually all its pilots over the duration of the pandemic and is now able to roll out flights quickly.

From April-June, SIA expects to have 98% of its air crew active, which is likely far ahead of its Asia-Pacific competitors which were constrained in different ways and are now restoring capacity more gradually than SIA.

Hence, SIA’s current capacity market share rose in five of six major route regions as compared to 2019, allowing it to capture the strong demand recovery since Singapore opened its borders from April 1 and removed pre-departure testing from April 26, as observed by Yap. “There is also evidence of high airfares, which we believe will hold through the June school holidays in Singapore, as well as over the course of summer in July and August,” writes the analyst.

As at May 13, SIA’s three-month forward booking profile now covers 48% of available seat capacity, just 5% points lower than for May 13, 2019. Three months earlier, the negative gap was wider at 19% points.

Business travel has also recovered together with leisure travel and driving demand for premium cabins, beating back earlier fears of online meetings permanently reducing business travel demand.

Yap’s analysis also suggests that SIA may be keen to redeem half of its $9.7 billion mandatory convertible bonds (MCBs) within the next two to three years, before their yields rise from 4% to 5% per annum (p.a.), as it is holding too much cash in his view, with a net debt position of only 8.5% as at March 31 as compared to 32% as at Dec 31, 2020.

“Redeeming part of the MCBs will reduce SIA’s shareholders’ equity and make SIA’s P/BV valuations look more expensive, which is another downside risk factor for investors to consider,” the analyst writes.

As at 11.11am, shares in SIA are trading at 5 cents down or 0.97% lower at $5.13 at a FY2022 P/B ratio of 0.68x.

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