The target price represents a P/B ratio of 1.15x and one standard deviation (s.d.) above the five-year historical average of 0.98x, bringing it closer to consensus estimates of 1.3x.

Lim says that the fair value estimates take into account the $1.1 billion worth of non-cash accounting gains from the merger between Vistara and Air India, which is expected to be completed in 4QFY2023, while assuming that SIA will redeem more of its mandatory convertible bonds moving forward.

SIA announced record revenue, group operating performance and net performance of $17.8 billion, $2.7 billion and $2.16 billion respectively for the FY2023 ended March 31, which Lim attributes to its first mover advantage while the aviation industry emerged from the pandemic.

“Going forward, coincident data suggests that near-term travel demand may remain more robust than expected, keeping flight ticket prices elevated for longer.” says Lim.

The International Air Transport Association (IATA) recently announced that passenger traffic demand remained robust in April 2023, with total traffic rising to 45.8% as compared to April 2022.

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='/capital/brokers-calls/rhb-upbeat-raffles-medicals-contract-win-providing-medical-services?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>RHB ‘upbeat’ on Raffles Medical’s contract win for providing medical services at Connect@Changi</a>

“Globally, air traffic is at 90.5% of pre-Covid levels, led by domestic traffic which has surpassed April 2019 levels by 2.9%. Meanwhile, international traffic rose 48.0% as compared to April 2022, with carriers in Asia Pacific (APAC) continuing to lead the recovery.” Lim adds.

In the near term, Lim says that further travel demand recovery is likely to be supported by the peak travel season ​​in the Northern hemisphere, as well as a more meaningful recovery in outbound travel from China in the second half of 2023.

SIA intends to increase its capacity further to around 90% of pre-Covid-19 levels by the end of FY2024, as forward passenger sales remain robust across all cabin classes.

See also: <a class='gtm_see_also_2_inread' style='text-decoration: underline;' href='/capital/brokers-calls/redevelopment-marina-square-decent-rnav-accretion-4-6-uol-says-citi?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>Redevelopment of Marina Square ‘decent RNAV accretion’ of 4% to 6% for UOL, says Citi</a>

However, she notes that SIA’s operating environment is set to become more competitive as regional airlines return more international capacity to the market. In addition, a recessionary outlook remains a key overhang on discretionary travel expenditure.

“We believe much of SIA’s recovery due to its first-mover advantage may have already been priced in given the recent rally in its share price, and remain cautious that SIA’s recovery momentum may begin to slow later this year.” Lim adds.

But Lim says that SIA’s commitment to service quality could differentiate it from its competitors and allow it to defend its market share with greater success, translating to further, albeit limited upside.

The analyst awaits further catalysts to justify SIA’s recent share price outperformance.

As at 11.45am, shares in SIA are trading 41 cents higher or 2.89% up at $7.81.

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