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UOB upgrades SIA to 'hold' with higher TP of $4.85

Felicia Tan
Felicia Tan8/2/2021 09:16 PM GMT+08  • 3 min read
UOB upgrades SIA to 'hold' with higher TP of $4.85
Shares in SIA closed 11 cents lower or 2.2% down at $4.99 on Aug 2, or 0.7 times P/B, according to UOB Kay Hian’s estimates.
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UOB Kay Hian analyst K Ajith has upgraded his call on Singapore Airlines (SIA) to “hold” from “sell” previously after the airline posted y-o-y narrower losses of $409 million for the 1QFY2022 ended June.

The airline, which also registered q-o-q narrower losses by 38% is deemed as a “key positive” to Ajith, but remains “in line with [his] expectations”.

“Adjusted book value per share, assuming full conversion of mandatory convertible bonds (MCB) and other convertible bonds, stood at $3.39, down from S$3.60 as at end FY2021,” he writes in an Aug 2 report.

In its results release, SIA posted a $171 million q-o-q decrease in its operating loss, excluding fuel hedges and mark-to-market charges. This compares to the airline’s guidance that there was a cash burn of about $100 million to $150 million per month in February.

“Thus we estimate that SIA’s cash burn would have narrowed down by between 33-50% monthly,” notes the analyst.

To this end, Ajith has increased his target price estimate to $4.85 from $4.15 previously.

“In modelling SIA, we have factored in $6.2 billion in mandatory convertible bonds (MCB) as shareholders equity, but have excluded that in our valuation. We raise our fair value price-to-book (P/B) valuation multiple to 1.15 times FY2022 and FY2023’s average vs 1.0 times previously. The change in valuation multiple is to factor in improved sentiment towards border reopening over the next quarters,” he writes.

That said, he does not see many changes in the airline’s circumstances yet.

“Very little has changed following the release of [SIA’s] full-year results. There is not much optimism on borders reopening, but the slower pace of vaccination rates at other Asian cities, effectively means that SIA has to add capacity carefully, factoring in both inbound and outbound demand as well as the potential for incremental bellyhold cargo revenue on such flights,” he notes.

The airline is, overall, less likely to add capacity to Southeast Asia given its slow vaccination rates.

“For 2QFY2022, SIA expects to add 33% of pre-pandemic capacity, which is at a similar level to that of 1QFY2022. SIA also stated that it has the means to add 50-60% of pre-pandemic capacity given that crew are on standby,” he says.

The airline’s pax yields, which remain elevated, are likely to normalise in the coming quarters. Cargo yields, on the other hand, are likely to remain firm in the FY2022 due to a shortage in bellyhold capacity.

Strong PMI and sea port congestions would be used to fund capex, he says.

On the lower pax yields, Ajith has raised his loss assumptions for the FY2022 by 46%.

A gradual relaxation of travel restrictions, he says, is an upside factor to the airline’s shares.

Shares in SIA closed 11 cents lower or 2.2% down at $4.99 on Aug 2, or 0.7 times P/B, according to UOB Kay Hian’s estimates.

Photo: Bloomberg

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