DBS Group Research has downgraded Singapore Airlines (SIA) to “fully valued” with a target price of $3.60 that’s based on 0.9 times FY2022 price-to-book (P/BV).

The target price represents -1 standard deviation (s.d.) of the stock’s five year mean P/BV. The price also takes into consideration that the mandatory convertible bonds (MCBs) from the airline are debt instead of equity as the brokerage sees SIA redeeming the MCBs within 10 years.

SIA’s share price has increased by 25% in the last month due to optimism that international air travel may return soon amid the positive vaccine development news. That said, at over 1 times FY2022 P/B with losses “likely to continue in the next 12 months”, the airline’s valuations are now “over-extended”, says the team.

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While international air travel is expected to recover “more meaningfully” in 2H2021 assuming the pandemic will be under control by then, the team at DBS expects SIA’s losses to continue for the time being, but to narrow in FY2022.

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“We project SIA’s losses to narrow from $4.5 billion in FY2021 to $130 million in FY2022 before recovering to a profit of $318 million in FY2023,” writes the team.

That said, the airline’s losses could be extended if demand for international air travel remains subdued for a prolonged period of time.

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“Upside or downside risk to our forecasts would depend on how quickly Covid-19 is controlled and how fast governments reopen their borders to international air travel,” it says.

As at 2pm, shares in SIA are trading 5 cents higher or 0.9% up at $5.39.