SINGAPORE (Aug 15): CIMB Research is raising its earnings per share (EPS) forecast for Singapore Airlines (SIA) in FY18F by a hefty 51% on the back of a cyclical upswing in cargo airfreight and a small recovery in business travel.

Core EPS forecasts for FY19F and FY20F were raised by 19% and 20%, respectively.

As a result, the brokerage is upgrading SIA to “hold” with a higher target price of $10.42, from “reduce” with a target of $10.00 previously.

“SIA Cargo has experienced year-on-year improvements in its earnings performance for three consecutive quarters,” says CIMB analyst Raymond Yap in a Sunday report. “During 1QFY18, it reported an EBIT profit of $6 million, from an EBIT loss of $34 million in 1QFY17, which accounted for the majority of the delta in the group’s overall performance.”

See: Singapore Airlines 1Q earnings fall 8.4% to $235.1 mil despite improved revenue

However, Yap cautions that the tailwind behind SIA’s recent share price outperformance could come under pressure as the global airfreight upswing, which started in mid-2016, is expected to see its momentum fade in the second half of 2017.

Meanwhile, competition across carrier airlines continues to intensify.

“Anecdotally, we hear that the Chinese carriers have been offering very competitive pricing on transpacific routes, attracting away the marginal Singapore passenger,” Yap says.

In addition, Yap opines SIA’s business-class demand is unlikely to be lifted significantly as the banking and oil & gas sectors – the bedrock of SIA’s premium class demand – are still in belt-tightening mode.

“We are not convinced that SIA’s share price can trade sustainably above its trough P/BV of 0.9x, where we have set our target price,” says Yap. “The momentum behind the cyclical upswing may have peaked, and structural competition is severe.”

As at 12.37pm, shares of SIA are trading 2 cents higher at $10.56.