CGS-CIMG analyst Raymond Yap has upgraded Singapore Airlines (SIA) to “add” from “hold” previously as he feels downside surprises to the airline are “limited’ due to its already impaired aircraft assets and completed equity capital raising exercise.
The upgrade also comes as SIA’s improving risk-reward owing to the group’s strong balance sheet, the Singapore government’s efforts to open borders and the potential introduction of a Covid-19 vaccine in 2021.
On June 8, SIA completed its $5.3 billion rights issue and issued its $3.5 billion mandatory convertible bonds (MCB) with a conversion price of $4.84.
The airline had also received secured financing of $2 billion on its A350 and 787 aircraft and at least $1 billion of additional secured financing that will come either via new secured debt or via sale-and-leaseback transactions.
In December, SIA will issue $850 million in five-year convertible bonds that carry a 1.625% coupon and conversion price of $5.743.
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On those, Yap says he expects SIA to have a gross cash balance of $8 billion by end December, as compared to $7 billion as at end September.
Amid the potential introduction of a working Covid-19 vaccine to be introduced in 2021 and the Singapore government’s gradual reopening of its borders, Yap believes investors will “allocate capital into the cyclical beneficiaries, such as airline stocks, with SIA being one of the safest airline stocks to be positioned in”.
As such, Yap has also upped SIA’s target price to $4.57 from $3.46 previously. He has also reduced his loss per share forecast for FY2021F by 14.5%, while increasing his estimates on FY2022-FY2023’s core loss per share to 6-21% to factor in the higher levels of debt and borrowings, as well as the potential issue of the $6.2 billion MCBs by July 31, 2021.
“Our previous target price of $3.46 was based on P/BV of 0.75x (pegged to -1 s.d. from the mean since 2011) on the FY23F book value of equity per share (BVPS),” he explains.
See: Singapore Airlines increases its multicurrency medium term note programme to $10 bil
“Based on the positives highlighted above, we suspect that we may have been too conservative. We now raise the P/BV multiple to 0.94x (mean since 2011) and now apply it against the FY22F BVPS to derive our new target price of $4.57,” he says.
“We are now using the mean P/BV as we have already incorporated the expected losses into the BVPS number. Hence, we may be double-penalising SIA if we continue to apply the -1 s.d. P/BV. Also, we are now using the FY22F BVPS as the FY23F BVPS is too distant to be able to forecast accurately and less immediate to investors today,” he adds.
Shares in SIA closed flat at $4.10 on Nov 18.
