Thanks to cargo traffic, Singapore Airlines (SIA) has reported its first quarterly report since the pandemic struck. While analysts are cheered by the numbers, they also caution that full recovery takes time, as risks of new variants and higher fuel prices loom.
CGS-CIMB analyst Raymond Yap was expecting the flag carrier to report a loss of $300 million, instead of core earnings of $28 million for 3QFY2022 ended December 2021.
Yap, who has an “add” call and a $5.88 target price on the stock from $5.86 previously, notes that SIA’s cargo arm outperformed expectations on the back of stronger demand, higher yields and lower unit costs on a y-o-y and q-o-q basis.
“The cargo strength was on account of the year-end spike in airfreight demand, as well as the container shipping congestion which forced cargo owners to move goods via airfreight instead,” writes Yap in his Feb 25 note.
SIA’s cargo flown revenue increased by 81.6% y-o-y to a record $1.35 billion, surpassing the $1 billion mark for the first time.
On Feb 25, SIA reported earnings of $85 million for the 3QFY2022 ended December 2021, reversing from the loss of $142 million in the same period the year before.
Despite this, the airline still posted a loss of $752 million for the 9MFY2022, although that is a 79.2% y-o-y improvement from the $3.61 billion loss in 9MFY2021. Revenue for 3QFY2022 more than doubled y-o-y to $2.3 billion, while revenue for 9MFY2022 was up 90.4% y-o-y to $5.14 billion.
Besides cargo, passenger revenue improved too, due to the introduction of so-called vaccinated travel lanes (VTL) from September 2021 onwards.
Despite higher than pre-pandemic fares, these flights were “enthusiastically embraced”. The airline’s passenger flown revenue increased 355.2% y-o-y to $833 million, on the back of a 556.8% growth in traffic, leading to a passenger load factor of 33.2% - up 18.9 percentage points.
Despite things looking up, Yap warns SIA might report a loss again for its 4QFY2022 ending March, with the year-end travel season over, along with softer cargo demand.
In addition, Singapore also suspended new ticket sales for VTL flights from Dec 23, 2021, to Jan 20, and halved the VTL daily quota from Jan 21 onwards, although it will fully restore the quota between Feb 17 and March 4.
On the cost side, spot jet fuel prices have surged to US$111 ($150.70) per barrel, from just US$85 per barrel three months back, with SIA hedged for just 30% of its needs in the current quarter.
Yap cautions that higher fuel prices will be a key downside risk given how the airline has hedged just 40% of what it plans to use for FY2023. Nevertheless, he says that “prospects for FY2023 continue to brighten”, says Yap, citing how Singapore has committed to restoring the full VTL quota from Mar 4 onwards.
The country has already simplified Covid-19 testing protocols to reduce the cost of travel into Singapore, and will eventually expand the VTL scheme to all vaccinated travellers from around the world by the middle of this year once the Omicron wave subsides.
Chu Peng of OCBC Investment Research has turned somewhat bullish too. While she kept her “hold” call, Chu has given SIA a higher fair value of $5.23, from $5.08 previously. Chu expects the airline’s recovery to gain pace, although that is on the assumption that no new variants will pop up.
Similar to CGS-CIMB’s Yap, for 4QFY2022, she sees SIA reporting a “softer q-o-q” due to seasonality impact and temporary suspension of VTL and reduction of quota in January and February 2022.
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DBS Group Research, meanwhile, rates SIA a “hold” but with a target price of just $4.90. Analysts Paul Yong and Jason Sum point out that a “cashed up” SIA is in a strong position to wait patiently for a recovery, citing the couple of fund-raising undertaken by controlling shareholder Temasek.
However, they worry over how the timeline for a sustained reopening of international borders to air travel continues to be pushed back with the emergence of new Covid-19 variants.
They also point out that the mandatory convertible bonds, with some $9.7 billion in issue, could be highly dilutive whether eventually redeemed or converted.
Yong and Sum also believe that SIA’s long-term recovery has largely priced in already, given how the share price is trading around 1.2 times its book value, which is not too far off its 10-year mean.
SIA shares closed March 2 at $5.07, down 0.78% for the day but up 1.2% year to date.