UOB Kay Hian analyst Roy Chen is maintaining his “hold” call for Singapore Airlines (SIA), with passenger volume recovering and strong airfares returning.
Chen has also kept his target price unchanged at $4.88.
“Our target price is pegged to [an] FY2023 P/B of 1.12x, which is 2.0 standard deviation above SIA’s historical average of 0.96x during the pre-pandemic years. SIA’s current price of $5.23 implies an FY2023 P/B of 1.20x,” he says.
In his report dated July 14, Chen says SIA, which is scheduled to announce its 1QFY2023 ended June 2022 business update on July 28 after trading hours, is likely to have turned a profit in this past quarter.
“We deem the street’s current FY2023 full-year net profit forecast of $316 million, compared to our forecast of $1.35 billion, conservative and due for positive surprises,” says the analyst.
“Looking beyond upbeat near-term earnings, SIA’s full recovery hinges on Northeast Asia, and its current valuation appears rich to us,” adds Chen. The analyst deems the airline’s current level of valuation as “unlikely to be sustainable by [its] fundamentals in the long run.”
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This is as SIA’s competitors may gradually recover or add more capacity, which would gradually drive passenger yields to more normalised levels.
For the upcoming 1QFY2023, Chen expects SIA’s reported net profit to come in between $180 million to $350 million, with its upcoming business update being the first quarterly reporting since Singapore’s major border measure relaxations in April. He also expects an overall positive tone from the company.
“As SIA is now in a turnaround situation whereby a slight variance in any of the underlying operating drivers, such as the speed or timing of workforce ramp-up and the level of pax yields, would result in significant fluctuations in profitability, we find it difficult to do a quarterly earnings estimate with good accuracy at this juncture,” writes Chen.
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He adds that UOB Kay Hian’s guided range of $180 million to $350 million is its “best guesstimate”, by referring to SIA’s reported net loss of $210 million in 4QFY2022 and adjusting for the rise in an estimated 150% q-o-q increase of passenger numbers in 1QFY23, as well as the surge in airfares in the recent months.
According to Bloomberg, the consensus has forecasted SIA to record a net profit of $316 million for the FY2023. This is compared to UOB Kay Hian’s FY2023 full-year net profit projection of $1.35 billion, or $487 million if the impact of a substantial fuel hedge gain of an estimated $860 million is excluded.
“We believe the street might have underestimated the power of SIA’s operating leverage and could be positively surprised by its upcoming 1QFY2023 results,” Chen says.
SIA’s near-term recovery momentum is strong, with the company stating that its launched passenger capacity has been well booked into 2QFY2023 with strong pax yields. In a recent press release, the company guided to further re-activate its pax capacity to 81% of pre-pandemic levels by December, ahead of UOB Kay Hian’s projected 75% by the same time.
Northeast Asia remains a drag, with China sticking to its “Dynamic Zero-Covid” policies and no timeline of opening up, and Japan and Taiwan opening borders with significant caution.
Writes Chen: “Strong near-term momentum aside, we note that the full recovery of SIA hinges on the re-openings of Northeast Asian countries (which collectively formed 26% of Changi Airport’s passenger throughput in 2019), as they have been significantly lagging against the backdrop of global air travel open-up.”
As of May, air traffic to Singapore from mainland China and the rest of Northeast Asia were only at 3% and 17% of their respective pre-pandemic levels, significantly lagging behind the air traffic to Singapore from the rest of the world.
Despite the relatively slow growth in travel from Singapore to the region, policy changes to open borders in Northeast Asian countries could prove to be a share price catalyst for SIA.
As at 11.33am, shares in SIA traded at $5.29 or 1.54% up.
