UOB Kay Hian analyst K Ajith has downgraded Singapore Airlines (SIA) to “sell” as he feels the airline is now “overvalued”.
In fact, SIA is more expensive now than it was two years ago.
“While the recent debt issuance would stave off operational risks, shareholder returns are likely to be severely crimped from higher interest payments as well as low return on invested capital (ROIC),” he writes in a Dec 4 report.
To be sure, Ajith views SIA’s stock price to have run ahead of foreseeable fundamentals.
Shares in SIA climbed in early November amid news of the potential release of a working Covid-19 vaccine. However, he believes that the “euphoria following the announcement of vaccines is unjustified and opine that SIA is overvalued, even after the recent pullback”.
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“For a start, we had already imputed a recovery in traffic for FY2022 and had pegged fair value at 0.9x to FY2022’s book value. While there is a great deal of uncertainty on the pace of traffic and load factor recovery, we believe pre-COVID-19 level FY20 EBITDA offers a fair hurdle in terms of earnings prospects for FY2021,” he says.
With that, Ajith says he has valued SIA on a “pre-Covid-19 and post-Covid-19 EV/EBITDA multiple”.
“The enterprise value factors in: a) $8.8 billion in rights and mandatory convertible bonds (MCB) issue; b) new convertible debt of $850 million and exercise of $500 million from a $10 billion medium-term note (MTN),” he adds.
The airline’s trailing EV/EBITDA multiple of 10.5x is more than 2 standard deviation (SD) to the 5-year mean.
“Given SIA’s massive fund raising, we believe EV/EBITDA multiple would provide a more incisive perspective on SIA and have factored in S$3.5b in MCB along with capitalised coupons,” he says.
“Based on that, SIA would be trading at a lofty 10.5x EV/EBITDA on historical EBITDA, which on a historical basis is more than 2SD to the 5-year mean, which is clearly is unjustifiable given the carrier’s massive recapitalisation. Even forward EV/EBITDA multiple at 11.0x is lofty and our net profit numbers are already higher than street estimates,” he adds.
Based on shareholder equity for FY2020 and added rights and MCB of $8.8 billion, SIA’s trailing book value would be $4.80. Book value would have stood at $4.43 upon the factoring in of SIA’s asset impairment announced in 1HFY2020.
To put things into contact, SIA used to trade at P/B multiples of 0.8-0.9x even prior to Covid-19, which makes it overvalued even on a P/B basis, says Ajith.
Despite the downgrade, Ajith has upped SIA’s target price to $3.80 from $3.75 previously, representing a downside of about 12.9% to the airline’s current share price of $4.38.
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“We believe that investors have not factored in the impact to SIA’s earnings from additional funding. While recent debt issuance would stave off operational risks, in the event of prolonged border closures, shareholders are likely to be severely crimped from higher interest payments as well as low return on invested capital, especially if much of SIA’s $10 billion MTN goes towards funding capex,” he says.
“We had upgraded SIA earlier to ‘buy’ on expectations of an imminent vaccine announcement and gradual border opening. That opportunity has passed and we now envisage downside risk to the stock,” he adds.
Ajith has also lowered his FY2022 loss estimates on the airline by $230 million after assuming higher load factors in 2HFY2022.
Shares in SIA closed 4 cents lower or 0.9% down at $4.38 on Dec 7.
