SINGAPORE (Nov 9): DBS Vickers Securities, CIMB Research, UOB Kay Hian and Maybank Kim Eng are maintaining their “hold” calls on Singapore Airlines (SIA) with higher price targets following the release of the carrier’s 2Q results on Tuesday.
See: SIA's 2Q earnings nearly treble to $190 mil; declares 10 cents interim dividend
In a Wednesday report, DBS analyst Paul Yong says weak yield remains a key concern for the airlines as passenger yields appear to have continued weakening over 1H18.
The research house raised its target price estimate on the stock to $10.30 from $10.10 previously to reflect 0.9 times FY18 price-to-book value (P/BV), which is at about -1SD its historical mean.
“SIA’s three-year transformation plan could pay off in the longer term, but we remain cautious on the company's near-term earnings outlook as its flagship passenger business continues to face stiff competition and soft yields, and is also vulnerable to the threat of higher oil prices,” says Yong.
As such, he sees core earnings prospects for SIA remaining under pressure from weak yields and higher fuel prices, and projects return on equity (ROE) at between 4.5-5% over the next two years.
Nonetheless, Yong has raised his FY18F and FY19F forecasts to the higher end of consensus estimates, though he believes his FY19F assumptions which include a 2% improvement in passenger yield could be “difficult to pull off” should competition remain keen.
Meanwhile, CIMB has raised its target price on SIA to $10.82 from $10.42 previously while rolling over to end-CY18F, still based on a trough P/BV multiple of 0.9 times.
The research house’s analyst Raymond Yap believes continued global PMI expansion and a healthy backlog of new orders by Asian exporters suggests that SIA Cargo should continue to do well in 2H18.
However, Yap thinks momentum behind the cyclical upswing may have peaked for SIA as oil prices are currently on the rise and structural competition currently remains strong. As such, he expects only modest earnings growth for the group in FY19F after a strong FY18F performance.
“SIA hedged 41% of its 2HFY18F fuel requirements at around US$65/bbl of jet fuel, and cover for FY19F is at a maximum of 47% at average Brent prices of US$53-59/bbl. That leaves more than half of fuel requirements unhedged, and passthrough to passengers will typically be at a lag,” notes Yap.
Separately, UOB analyst K Ajith has raised the stock’s target price to $11.10 from $10.10 previously to value core airline operations at 0.8 times FY18’s book value, despite an implied ROE of just 3.8%.
Although Ajith holds the view that cargo profits would likely see y-o-y growth in 3Q18, he thinks cargo recovery could peter out beyond FY18 – especially if freighter capacity increases.
“We believe that increasing capacity addition by the Chinese carriers towards ASEAN could have impacted short-haul yields for both parent airline and Silk Air. That said, we have assumed that yields will improve by roughly 1.5% in 2H17. Beyond that, there is a possibility that capacity additions by Norwegian Air and Qantas could derail,” he adds.
UOB’s suggested entry price for SIA is $10.30.
While Maybank analyst Mohshin Aziz acknowledges that SIA is performing well ahead of expectations, he believes its valuations to be lofty at a FY19E PER multiple of 21 times versus peers' 13.6 times.
"On a relative basis, it is just not attractive enough and doesn't justify the risk," comments Aziz, who raises FY18-20 earnings forecast by 50%, 36% and 48% respectively on an improving yield outlook but has only raised the stock's target price by 1% to $10.95 from $10.85 previously based on the long-term P/BV mean of 0.93 times.
The analyst expects modest capacity growth of 2-3% over the next two years based on the SIA management's latest guidance of netting six aircraft for 2018-19, with its core growth areas being regional routes and some long-haul routes suited for budget-conscious travellers.
As at 11:18am, shares in SIA are trading 1.21% higher at $10.88.
