UOB Kay Hian analyst K Ajith has maintained his “hold” call on Singapore Airlines (SIA) with an unchanged target price of $4.85.

His target price indicates a valuation of an average book value of 1.15 times for FY2022 and FY2023.

The valuation factors in a recovery in aviation traffic, writes Ajith in a Sept 22 report.

Following the news that the US will open borders to vaccinated travellers from November, the airline’s stock price has risen by 3.5%, notes the analyst.

“The opening up of the transatlantic travel market is the most significant development for international air travel since the start of the pandemic,” he writes.

“This will pave the way for improved connectivity to other destinations. However, much of Asia, including Australia, still operates under travel restrictions,” he adds.

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The move by the US will lead to greater pressure on China to ease travel restrictions, as the latter is a key market for air travel.

However, the general opinion is that China may be cautious in easing cross-border travel ahead of the Beijing Winter Olympics held in February 2022.

“Still, the move is a clear boost for international travel and International Air Transport Association (IATA) terms this as “a key shift in managing the risks of Covid-19 from blanket considerations at the national level to assessment of individual risk”,” he says.

In terms of air fares with the formation of vaccinated travel lanes to Brunei and Germany from Singapore, the airlines’ website indicates that there has been no material increase in ticket prices to German cities Munich and Frankfurt compared to pre-pandemic levels.

“The relatively low prices suggest that capacity still exceeds demand and this is likely to be the case over the next two quarters. This is in line with SIA’s own guidance for normalisation of pax yields,” notes the analyst.

Looking ahead, yields are likely to remain weak in the 2QFY2022 and that pax flown revenue may not improve materially, says Ajith.

SIA’s cargo revenue, which surged 21% q-o-q in the 1QFY2022 was the main reason behind the $70 million reduction in operating loss for the period. On this, Ajith says he will still expect cargo to be the airlines’ main earnings driver, which should contribute to a q-o-q reduction in losses.

“While efforts are being made to open up borders, the varying rate of vaccinations, renewed infections and changing regulations mean that the odds of a swift recovery in travel is slim,” he writes.

“For SIA, high yield business traffic could also recover at a slower rate. From a valuation perspective, SIA is

trading at close to 1.2 times FY2022’s adjusted book value, which is 30% higher than pre-pandemic levels,” he adds.

Naturally, a gradual relaxation of travel restrictions has been identified as a key catalyst to SIA’s share price.

Shares in SIA closed 2 cents lower or 0.4% down at $4.95 on Sept 22, or an FY2022 P/B of 0.7 times.

Photo: Bloomberg