UOB Kay Hian analyst K Ajith has downgraded Singapore Airlines (SIA) to “sell” with a lower target price of $4.40 from $4.43 previously.

“We had previously valued SIA at 1.0 times and FY2022 and FY2023’s book value to derive a target price of $4.43. We now raise our fair value price-to-book (P/B) assumption to 1.1 times FY2022 and FY2023 average and derive a target price of S$4.40,” he writes in a report dated April 14.

“Excluding [the] $6.2 billion in mandatory convertible bonds (MCB) which is recognised as equity, SIA is trading at about 1.6 times FY2022’s book value or about 70% premium to pre-Covid-19 levels… [which] is anything but cheap,” he adds.

The way Ajith sees it, SIA’s stock price is now trading higher than its foreseeable fundamental value.

SEE:Singapore Airlines trials pre-departure Covid-19 tests to revive travel

Want our latest Singapore corporate news stories for FREE

Follow our Telegram, Facebook for the latest updates round the clock

Since 4QFY2020, the airline’s stock price has tracked the US Global Jets (JETS) ETF, and its stock price is only about 7% away from its pre-Covid-19 levels since news of the Covid-19 vaccine broke.

“We believe that much of the re-rating on SIA was led by ETF purchases on expectation that vaccinations would lead to a swift recovery in traffic. While domestic air travel has recovered in China and moderately in the US, international air travel has shown no signs of recovery as governments grapple with increasing infections and new strains,” he writes.

For the airline, this translates to a monthly operating cash burn of between $200 million to $250 million. The carrier had also guided for $4 billion in capital expenditure (capex) for FY2022 and another $4.5 billion in FY2023.

“Assuming that capex is distributed evenly, at 1HFY2022, SIA could have utilised at least $3.8 billion in cash or 30% of its liquid funds,” notes Ajith.

“A key uncertainty is whether SIA will exercise the option to tap into another $6.7 billion in MCB. The option will expire by July. Given these uncertainties, we downgrade SIA to ‘sell’,” he adds.

Uncertainty in the recovery of international travel

Investors’ optimism on the airline due to the promise of the gradual reopening of borders, rapid vaccination rates and the formation of travel bubbles boosted the counter by 30.8% year-to-date as at March 12, which outperformed the Straits Times Index’s (STI) 11.6% gain over the same period, as well as the JETS ETF, which is trading some 10% below pre-Covid-19 levels.

However, with the low rates of vaccination outside Singapore and with news of new Covid-19 strains emerging, Ajith says he is now “less optimistic” of a traffic recovery by 3QFY2021.

As such, he has raised his FY2022 loss assumptions by 247%. He has also lowered passenger traffic growth assumption for FY2022 by 34% and passenger load factor assumption by four percentage points.

The economic reality, he notes, is also not as rosy as most might think. Airlines around the world are still facing bankruptcy or are still being bailed out a year after Covid-19. The International Air Transport Association (IATA) has estimated that airlines could burn through US$75 million ($100.6 million) to US$95 million in cash for 2021, while Air-France KLM is seeking EUR4 billion ($6.40 billion) in state aid as well as from other parties including China Eastern Airlines.

Furthermore, the rollout of the digital travel passports from May 1 would not spur border openings, notes Ajith.

For more stories about where the money flows, click here for our Capital section

“Travellers coming into Singapore are expected to use IATA’s digital travel pass to share pre-departure Covid-19 Polymerase Chain Reaction (PCR) results from accredited laboratories or vaccination details during check-in and immigration checkpoints at Changi Airport.”

At the moment, Singapore currently only allows air travel under reciprocal green lanes scheme (RGL) for two countries and Air Travel Pass scheme for five countries, he adds.

As at 12.08pm, shares in SIA are trading 3 cents lower or 0.5% down at $5.50.