CGS-CIMB Research analyst Raymond Yap has upgraded his call on Singapore Airlines (SIA) to “add” as he becomes “more confident” about the strong demand outlook for the airline’s services.
Yap has also lifted his target price on the airline to $6.10 from $5.89.
“We expect SIA to do very well in the coming quarters, due to the combination of rising capacity restoration, strong demand, high load factors and robust yields,” he writes.
“The SIA group’s available seat kilometres (ASK) capacity rose from 4QFY2022’s 52% of the pre-pandemic base to 1QFY2023’s 66% and we forecast further recovery to 73% in 2QFY2023 and to 79% in 3QFY2023,” he adds.
The airline’s financial year ends in March.
For FY2023, Yap sees the SIA group returning to around 74% of its pre-Covid-19 capacity and rising to at least 95% in FY2024 or higher, if China reopens its borders sooner.
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“Strong demand is likely to sustain average passenger yields at historically-high levels in FY2023, albeit still lower than in FY2022 due to the small traffic base in the comparative year,” he writes.
“Cargo yields are also likely to remain elevated, especially between Europe and Northeast Asia, due to the avoidance of Russian airspace,” he adds.
Further to his report, the analyst also points out that competition has been “relatively muted” so far. Currently, airlines in Southeast Asia are gradually ramping up capacity deployment, while certain key competitors such as Cathay Pacific and the mainland Chinese airlines still held back by Hong Kong’s border controls, he notes.
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In addition, SIA expects the strong demand seen in the 1QFY2023 to continue till December based on the robust forward booking curve.
“In our view, the strong demand was on account of a powerful mix of pent-up travel demand, lags in competitors’ capacity restoration (due to operational bottlenecks at individual airlines), and North Asian governments’ continued closure of their borders which handed SIA greater market share of transfer traffic through Changi at the expense of say, Hong Kong,” says Yap.
To this end, Yap has raised his passenger load factor (PLF) estimates to 83% for the FY2023 from 79% previously. In the 1QFY2023, the airline reported a PLF of 79% with June’s PLF at 85.5%.
In light of this, Yap has also upped his PLF assumptions for the FY2024 to FY2025 to 82% from 79% to 80% previously.
On this, Yap has raised his core earnings per share (EPS) estimates for the FY2023 to FY2025 by 55% to 66% to factor in his upward revisions to his PLF assumptions.
Further to the pent-up demand for travel, Yap also sees demand for SIA’s services likely to be boosted by the Singapore Formula 1 Night Race, which will be happening from Sept 30 to Oct 2.
“Anecdotally, Singapore is seeing strong inflows of foreign professionals, while the F1 race event… could draw as many as 35,000 tourists, with hotel room rates already spiking,” he writes.
“Separately, the line-up of MICE (or meetings, incentives, conferences and exhibitions) events in 2H2022 could further boost inbound travel into Singapore; these include major international events, such as Food and Hotel Asia – Food & Beverage (Sept 5 - 8) and Food and Hotel Asia (Oct 25 - 28), with each expected by the Singapore Tourism Board to attract more than 30,000 physical attendees,” he adds.
As at 12.02pm, shares in SIA are trading 3 cents higher or 0.56% up at $5.41.
