DBS Group Research analysts Paul Yong and Jason Sum have downgraded Singapore Airlines (SIA) to “fully valued” from “hold” with the same target price of $3.60 as they feel a recovery will take time.
The analysts believe that international air travel could start to recover more meaningfully only from 2H2021.
“With many governments planning for a rollout of COVID-19 vaccines in 1H21, we could see international travel beginning to rebound from 2H21, starting from developed markets, assuming the pandemic is under control by then,” they write in a report dated Dec 14.
To this end, Yong and Sum project the airline’s losses to narrow from $4.5 billion in FY2021F to $130 million in FY2022F before turning around to post a profit of $318 million in FY2023F.
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The analysts also believe investors are too optimistic on the stock now that the airline’s share price has run ahead of its fundamentals.
“SIA’s share price has increased by over 25% in the last month on positive vaccine development news, however, we believe that at over 1x FY22F price-to-book (P/B) with losses likely to continue in the next 12 months, its valuations are now over-extended,” they note.
On this, Yong and Sum have pushed back SIA’s traffic recovery trajectory to 67% of pre-Covid-19 levels by end-2021 compared to their previous assumption of normalisation by end 2021.
This, they say, is due to the second waves of infections and a record high number of new Covid-19 cases in Europe and the US, and that deployment of the vaccine will take time.
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The way they see it, the airline’s losses would be extended if travel demand remains substantially subdued for a prolonged period.
“Upside or downside risk to our forecasts would depend on how quickly COVID-19 is controlled and how fast governments reopen their borders to international air travel.”
Shares in SIA closed flat at $4.42 on Dec 14, or 1.3x book value according to DBS’s estimates.
