OCBC Investment Research analyst Ada Lim has increased her fair value estimate on Singapore Airlines (SIA) C6L to $7.18 from $6.50 previously after the airline’s share price rallied some 20.2% year-to-date (ytd) to close at $6.60 on June 5.
The airline’s current share price levels have already surpassed its pre-pandemic levels and hit fresh 52-week highs, Lim notes.
Much of SIA’s outperformance comes after its record revenue and earnings for the FY2023 ended March 31.
The analyst’s new fair value estimate represents a higher target P/B ratio of 1.1x from 1.0x previously, or 1 standard deviation (s.d.) above the airline’s five-year historical average of 0.98x.
Going forward, Lim sees two key factors that could be catalysts to SIA’s share price and earnings.
First, near-term travel demand could remain more robust than expected
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On June 1, the International Air Transport Association (IATA) reported that passenger traffic demand remained robust in April. During the month, total traffic rose by 45.8% y-o-y.
“Globally, air traffic is at 90.5% of pre-Covid levels, led by domestic traffic which has surpassed April 2019 levels by 2.9%. Meanwhile, international traffic rose 48.0% as compared to April 2022, with carriers in Asia Pacific (APAC) continuing to lead the recovery,” says Lim.
She adds that further recovery in the demand for travel is likely to be supported by the peak travel season in the Northern Hemisphere. A meaningful recovery in outbound travel from China in the second half of 2023 is also likely.
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“As easing inflation and declining jet fuel prices moderate cost pressures, strong air traffic demand may sustain for a longer period of time, presenting further upside potential for airlines,” she writes.
Second, SIA’s commitment to quality service still puts the airline ahead the rest of its peers. The airline recently made several announcements including dialing back on an unpopular decision to use paper service ware on some of its flights. SIA, on May 31, also said that it would provide free unlimited wifi for passengers in economy and premium economy from July onwards.
“We think that SIA’s responsiveness underscores its commitment to service excellence, and is a long-term positive for its brand image. This could prove to be a powerful asset and lend SIA greater competitiveness and resilience in defending its market share when demand and prices begin to normalise,” says Lim.
“Separately, we also look favourably on SIA’s planned joint venture with Garuda Indonesia, which will expand SIA’s network connectivity, in line with its longer-term strategy,” she adds.
At the same time, Lim has retained her “hold” call on the airline as she sees that much of SIA”s recovery may already have been priced in following its share price rally.
“[We] remain cautious that SIA’s recovery momentum may begin to slow later this year amidst a more competitive regional landscape and recessionary outlook,” she says.
The regional landscape is expected to become more competitive as regional airlines return more international capacity to the market, she notes. At the same time, a recessionary outlook may also be a key overhang for discretionary travel expenditure, thus impacting SIA negatively.
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In her environmental, social and governance (ESG) update, SIA has scored better than its global peers in terms of its ‘S’ pillar with its compensation practices, higher customer satisfaction, and on-time performance metrics. However, its ‘E’ and ‘G’ pillars still rank below the industry average.
“As a state-owned firm, minority shareholders of SIA may face risks of their interests being subsumed by those of the Singapore government,” Lim says, on SIA’s ‘G’ pillar.
On the ‘E’ pillar, the analyst notes that the airline’s carbon emission intensity still exceeds the industry average despite SIA’s relatively young fleet and reduced intensity by an average of 12% a year.
“However, SIA appears to have stepped up its environmental efforts to achieve net zero carbon emissions by 2050, with continued investment in new generation aircraft, adoption of low-carbon technology such as sustainable aviation fuels, and carbon offsetting,” she notes.
Shares in SIA closed 8 cents higher or 1.18% up at $6.88 on June 6.
