Citi Research analyst Kaseedit Choonnawat has upgraded Singapore Airlines (SIA) C6L to “buy” from “sell” after seeing a stronger-than-expected yield outlook.
“Our previous SIA downgrade to ‘sell’ from ‘neutral’ in December 2022 was based on macro-driven softer long-haul demand, supply resumption and Air India's potential drags,” he explains.
In his report dated April 18, the analyst reveals that the brokerage conducted a ticket bookings exercise on SIA’s top 15 routes and found that the airline was charging 30% premiums on average for its non-stop flights compared to its one-stop flights. This is compared to the 20% to 25% premiums charged pre-Covid. The exercise also found that SIA had limited some of its one-stop flight alternatives even though they’re still in operation.
The combination of both the higher premiums and the limitation of one-stop flight alternatives means the industry’s supply resumption is less damaging to SIA’s pricing at least into the year-end of 2023.
In addition, the analyst expects the airline to enjoy an upside in its passenger yield going into summer and possibly lasting till the end of 2023. As such, he has upped his FY2024 – FY2025 yield assumption to 15% and 9% respectively above its pre-Covid’s 6% and 3% respectively.
In his report, Choonnawat is also seeing a potential sign of stabilisation in SIA’s cargo yields.
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“We adjust FY2024-FY2025 cargo yield assumption to 36% and 9% above pre-Covid from 40% and 5% respectively earlier. Nonetheless, the industry’s spot yield appears to be stabilising at [around] 35% above pre-Covid in recent weeks. Together with improving [the] second derivative of air cargo volume, cargo yield may surprise on the upside despite the industry’s returning belly space capacity,” he writes.
SIA, which announced its operating results for March on April 17, noted that the group saw strong sequential passenger traffic and load factors across all its route regions.
In March, the group’s passenger capacity was up by 10.9% m-o-m and stood at 79% of its pre-Covid-19 levels. The pre-Covid-19 period refers to January 2020, before the onset of the pandemic.
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Amid all these factors, Choonnawat has upped his target price to $6.41 from $5.16 previously. The new target price is based on SIA’s FY2024 P/BV of 1.35x in relation to its 11.8% prospective core return on equity (ROE) from an FY2024 P/BV of 1.1x and 8.3% estimated core ROE.
He has also increased his earnings estimates for FY2023, FY2024 and FY2025 by 22%, 80% and 82% to factor in higher overall unit revenue of -1.4%, 7% and 4.3% and partly offset by the 11% and 2% higher effective jet fuel prices in FY2024 and FY2025 respectively.
On top of his double upgrade, Choonnawat has opened a 30-day positive catalyst watch as he expects SIA’s management to provide strong guidance at its FY2023 results briefing on May 17.
His upgraded earnings estimates are above the consensus at 4%, 15% and 87% for FY2023, FY2024 and FY2025 respectively.
As at 1.13pm, shares in SIA are trading 6 cents higher or 1.05% up at $5.80.
