DBS Group Research analysts Jason Sum, Tabitha Foo and Paul Yong see Singapore Airlines C6L ' C6L (SIA) financial results for the FY2024 ending March 31 to be another record year although they also expect the airline’s earnings to peak then. The airline reported earnings of $2.16 billion in the FY2023, making it the highest in its 76-year history. SIA also posted record net profits for the 1QFY2024and 1HFY2024.
“We anticipate SIA’s earnings to peak in FY2024, though earnings will remain elevated at above pre-pandemic levels over the next two years,” say the analysts in their Jan 18 report.
That said, they expect to see some downward pressure from the airline as supernormal passenger yields revert to more normalised levels albeit at a more gradual pace than initially anticipated.
SIA’s capacity growth is also likely to be inadequate to fully offset lower unit revenue in FY2025/FY2026, the analysts note.
“With SIA’s capacity already restored significantly at [around] 93% of pre-Covid-19 levels, the group faces constraints in increasing capacity further and has lesser scope to drive unit costs down,” they write.
At SIA’s current share price levels, valuations are broadly in line with its fundamentals, considering that the airline’s earnings will moderate over the next two years.
“Comparing to peers in the region that not only have greater headroom for recovery and exhibit superior earnings trajectory, but also present more compelling valuations, the risk-to-reward profile for SIA appears fair for now,” say the analysts.
For the FY2024 and FY2025, the analysts have lifted their earnings estimates by 11% and 18% to $3.77 billion and $1.75 billion respectively on expectations of slightly softer but more resilient passenger yields.
They have also increased their target price to $7 from $6.80 previously. Their new target price is based on 5.1 times EV/ebitda on their blended FY2024/FY2025 estimates and 1 standard deviation (s.d.) below SIA’s five-year pre-pandemic average.
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While the analysts still see favourable macroeconomic indicators for the airlines sector on the whole, they expect to see a divergence in earnings across regions and business segments.
“This underpins our expectation of global passenger traffic hitting 105% - 110%/115% - 120% of 2019’s level in 4Q2024/4Q2025,” they say.
Across the three major regions – Asia Pacific (APAC), Europe and North America, the analysts are most positive on airlines in APAC as they are expected to see “stronger earnings momentum, underpinned by relatively higher capacity growth and wider margins”.
The Chinese airlines are likely to see the biggest upswing in earnings, the analysts add. Within the region, their top picks are Cathay Pacific and China Southern Airlines.
As at 10.42am, shares in SIA are trading 8 cents higher or 1.25% up at $6.50.
