CGS-CIMB's Raymond Yap has maintained his "reduce" call on Singapore Airlines C6L , and with a lowered target price of $5.66 from $6.78 previously.
In his Oct 17 note, Yap estimates that SIA's earnings had peaked for its 1QFY2024 ended June 30, because of higher fuel costs on one hand, and softer yields on the other.
Yap figures that SIA may on Nov 7 report 1HFY2024 core EBIT of between $1.36 - $1.4 billion, a drop from the preceding 2HFY2023's $1.46 billion.
Specifically, given how SIA has reported a core EBIT of $755 million for its 1QFY2024, Yap says 2QFY2024 will likely range between $600 - $650 million.
Yap notes that spot jet fuel prices had increased by 20% q-o-q to an average of US$110 per barrel in 2QFY2024. He estimates that for every increase of US$1 per barrel in oil prices, SIA's current FY2024 earnings will drop by 1.8%.
Yap notes that SIA has hedged about 39% of its fuel requirements for the 9-month period from Jul 2023 to Mar 2024 and this would have helped mitigate the rise in jet fuel prices.
"However, the rally in oil prices arising from the Saudi Arabia and Russia export cuts in the second half of 2023, and a further rally on the back of Middle East geopolitical risk after the outbreak of the Hamas-Israel war, could nevertheless raise SIA’s operating costs in the months ahead," says Yap.
According to the US Energy Information Administration (EIA), the benchmark Brent crude for 2024 is seen to increase from US$88 to US$95 per barrel.
On the other hand, SIA's passenger and cargo yields are seen to gradually decline, as other airlines continue to reactivate aircraft and increase competition. Yap estimates that passenger yields in 2QFY2024 had contracted by 1.5% q-o-q. Cargo yields had similarly contracted.
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These factors would have likely offset the 5.5% q-o-q growth in revenue passenger kilometres (RPK) demand for SIA and Scoot combined, as both airlines increased their flight capacities and passenger load factors.
Yap's previous target price for SIA was based on 1.12x P/BV, which is 1.5 s.d. above mean.
His new target price of $5.66 is based on target P/BV of 0.91x (average since 2011) and rolling forward to end of calendar year 2024.
SIA shares closed Oct 17 at $6.28, down 0.79% for the day, having gained 14.39% year to date.
