Analysts from Citi Research and CGS-CIMB Research are mixed in their outlook on Singapore Airlines (SIA) after the airline announced that it will redeem the whole of the first tranche of its mandatory convertible bonds (MCBs) on Oct 25.
The redemption amount will total $3.86 billion, which is the sum at 110.408% of the principal amount of $3.5 billion. It will take place on Dec 8.
Citi Research analyst Kaseedit Choonnawat has maintained his “neutral” call on SIA while lowering his target price (TP) to $5.19 from $5.79 previously.
The analyst says he has updated his SIA model on the latest trends, which includes revising FY2023 ending March 2023 to FY2025 ending March 2025 core earnings to $1.2 billion, $1.09 billion and $1.2 billion from $460 million, $1.5 billion and $1.1 billion respectively.
“Upward adjustments in FY2023 reflect strong pent-up demand where strong passenger yield attracts capacity back to the market from winter 2022/2023, which we expect to result in pricing normalisation from FY2024,” says Choonnawat.
His TP of $5.19 is based on a 1.2x FY2024 price-to-book value ratio (P/BV), assuming the full redemption of mandatory convertible bonds (MCBs), in relation to 8.6% prospective core return on equity (ROE) — the historical trading relationship of SIA’s P/BV against core ROE. Choonnawat’s revised earnings are 12% above consensus in FY2023, in line for FY2024 and 5% above in FY2025.
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Meanwhile, CGS-CIMB Research analyst Raymond Yap has maintained his “add” call for SIA as well as his target price of $6.10, while retaining his assumption that half of the total MCBs will be eventually redeemed.
“In terms of our valuation, we are using adjusted book value assuming that half of the MCBs will be redeemed. This assumption still stands, as the total face value of MCBs issued is $9.7 billion and half is $4.85 billion; so far SIA has announced the redemption of $3.5 billion,” says Yap.
His retained TP of $6.10, is rolled over from end-2022 to end-2023, using a target P/BV multiple of 0.90x applied to the end-FY2024 book value per share (BVPS). “The previous target price was based on a higher P/BV multiple of 0.95x applied to the end-FY2023 adjusted BVPS; we have cut the P/BV multiple in view of the downside risks for the air freight market,” he explains.
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Yap says he does not expect SIA to redeem more than half of the MCBs, because of heavy capex commitments in future years mainly for aircraft delivery and a potential reduction in operating cash flow generation beyond FY2023 due to possible slowdown in air cargo markets and rising competition in the passenger aviation business. Other reasons include his forecast of rising net debt levels for SIA in future years and the necessity for SIA to keep a higher gross cash balance due to heightened business risks.
He notes that SIA has a second $6.2 billion tranche of MCBs issued on June 24 2021, which remains unredeemed. “SIA is partially redeeming the MCBs because it has ample cash. As at June 30, SIA had $16.1 billion gross cash balance and a small net cash position after deducting debt of $15.7 billion,” he says.
“During the June 2022 quarter alone, SIA increased its gross cash balance by $2.3 billion due to the ramp-up in operations and the monies from forward sales; we expect even more interest-free forward sale monies in the September and December quarters this year,” adds Yap.
Citi’s Choonnawat says he believes and assumes that SIA to call back entire MCBs with uncertainties on how much SIA would prefer to get involved with the Air India and Vistara integration. The way he sees it, there is limited upside at the current valuation of 1.2x FY2024 P/BV in relation to 9.5% prospective core ROE.
“We would view SIA’s incremental investment into Vistara and Air India integration as near-term negatives given loss records of both airlines and negative equities of Air India as well as its plans to triple its fleet size. However, we see cases for long-term positives,” he says.
Key upside risks to Choonnawat’s valuation include fuel prices declining, improvements in the European geopolitical situation leading to lower inflation and further falling out of Asean competitors.
On the other hand, his key downside risks include faltering demand beyond the pent-up period, a faster than expected restructuring of Asean flag carriers leading to the resumption of non-stop capacity from other hubs, reducing connecting traffic from Singapore and further increases in costs.
CGS-CIMB’s Yap, expects SIA’s likely strong 2QFY2023 results, which will be released on Nov 4 2022, to be the key re-rating catalyst, while a key downside risk is the potential for weaker cargo profits.
As at 11.31am, shares in SIA were trading 1 cent or 0.19% down at $5.30.
