Analysts from Citibank and CGS-CIMB have given differing calls for SIA, with Citibank’s Kaseedit Choonnawat handing the stock a “sell” rating and target price of $3.90.
He notes that SIA has narrowed its losses in 2QFY2021 to a core loss of $325 million, sequentially narrowing 32% q-o-q and 62% y-o-y. 1HFY22 core loss was 78% and 82% of his and the consensus' FY2022 full-year loss estimates.
While Choonnawat does acknowledge that news flows are “incrementally positive”, with SIA aiming to operate 43% of pre-Covid passenger capacity by Dec21 compared to 32% as of Sep21.
Singapore also has been rapidly launching vaccinated travel lanes, where he sees empirical evidence of demand surge in the premium class, as well as international tourism recovery at key global leisure centric countries.
Choonnawat also observes that relevant hub airlines competitors in ASEAN continue to downsize, while SIA’s strong cash position open potential opportunities for inorganic growth such as in India.
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Nonetheless, he believes SIA will likely make losses until capacity and passengers levels are back to about 70% of pre-Covid subjected to pricing power.”
He also points at the number of diluted shares, which have increased by over four times compared to pre-Covid due to capital raising.
“We continue to find its FY24 forecast of 1.3x price to book value too demanding, even assuming a full recovery with an ambitious 6% FY2024 return on equity.”
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Instead of SIA, he highlights Sats as his fundamental pick for a proxy to Singapore's air-travel recovery.
DBS analysts Paul Yong and Jason Sum write in their Nov 19 note that they also think that the improving outlook for SIA is largely priced in, giving the stock a "hold" rating and target price of $4.90.
"Trading at 1.3x adjusted P/BV, or close to +2 standard deviation of its 10-year mean, we see SIA’s longer-term recovery as largely priced in already," they write. However, they do acknowledge that the airline is in a "strong position" to wait for the eventual recovery.
The issuance of the $6.2 billion bonds in 2021 ensures SIA remains financially sound and in a strong position to recover, but it also could also be highly dilutive, regardless if they are eventually redeemed or converted.
Yong and Sum note that a total of $9.7billion of MCBs are now in issue, with a yield to call of 4% in the first 4 years and up to 6% in years 8 to 10,
This, in their view, means that the bonds are "highly dilutive" whether they are redeemed or converted.
They say, "we believe SIA would look to redeem most, if not all, of these MCBs as soon as demand recovers and stabilises."
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On the other hand, CGS-CIMB analyst Raymond Yap thinks prospects for the airline are “brighter” on the back of the VTLs and record revenue in its cargo segment.
Yap has a “hold” call and increases his target price slightly to $5.81, believing that the year-end peak for cargo may help further narrow losses in 3QFY2022.
Furthermore, he expects VTL schemes will likely make a bigger contribution, with more destinations coming into play in 4QFY2021.
He also notes that Australia, which he calls a “very important market for SIA”, has permitted its residents to travel overseas from Nov 1 and will reopen to vaccinated Singaporean travellers from Nov 21.
However, despite the optimistic travel outlook, Yap has widened his FY2022 core net loss forecast “as we assume a slower pace of capacity restoration and higher Brent cost forecast of US$73 per barrel vs US$70 per barrel previously”.
His profit forecast for FY2023 is downgraded to a loss and his forecast for FY2024 is slashed by 44% due to higher fuel cost assumptions.
Jet fuel is highlighted by Yap after the airline revealed it had exited a large portion of its hedges in the past six months. He thinks that as a result of this, the airline will be exposed to higher fuel cost volatility due to reduced hedge cover.
“We previously estimated that SIA had 100% fuel hedge cover for FY2022, 73% for FY2023 and 60% for FY2024, based on legacy contracts.”
SIA now has fuel hedge cover for 2HFY2022 of only 30% (at a Brent strike price of US$57 per barrel) and of 40% from 1QFY2023 to 1QFY2024 (at a strike price of US$60 per barrel), beyond which there are no further hedges.
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While derivative profits of US$24 million will be booked in 2HFY2022 and US$208 million beyond that, Yap is of the view that the lower hedge cover “is a surprise development that may increase SIA’s fuel cost risk”.
Shares of SIA closed at $5.35 on Nov 18, up one cent or 0.19% higher compared to its previous close.
