UOB Kay Hian analyst K Ajith has upgraded Singapore Airlines (SIA) to “buy” with an increased target price of $3.94 from $3.53 as he feels Singapore’s formation of travel bubbles is “likely to gain momentum” in the next three months.
“Together with the government’s proposal to provide Covid-19 travel insurance, this reduces the risk profile of travellers. We are now more positive on cargo operations rather than the recovery in pax traffic, especially from higher freight rates when the vaccine dissemination gets underway,” he says.
The Singapore government announced on Oct 20, that it will provide subsidies and insurance coverage for Singaporeans, permanent residents and long-term pass holders who develop Covid-19 symptoms within 14 days of their return.
“We believe this move will boost confidence in air travel, leading to more advance bookings and improving SIA’s cash flow,” Ajith adds.
Following the announcement of the travel corridor with Hong Kong, Ajith believes Singapore will negotiate with Australia, China, Japan, Taiwan and Thailand to make similar arrangements.
The airlines’ ramp-up of cargo operations is also likely to reduce core losses in 2HFY2021.
“Presently, cargo operations account for almost 80% of group capacity while load factors achieved a record high of 89% in Sept 2020, implying a shortage of cargo capacity,” he says.
“Even if more countries open their borders, we believe SIA will continue to add more cargo capacity by: a) converting some of Scoot’s A320 aircraft to carry cargo; and b) utilising SIA’s older B777-300 to carry dedicated cargo. We also believe cargo operations would be much more lucrative than passenger operations.”
“Scoot’s reconfigured A320 can carry almost 20 tonnes of cargo and current cargo rates are at S$5-6/kg, more than double of that in the previous year. Some industry experts believe cargo rates could go up to US$10/kg once vaccines are moved via air,” he adds.
To that end, Ajith has identified three catalysts on SIA including the opening of borders between China and Singapore, the conversion of more passenger aircraft to carry cargo and the announcement of the Covid-19 vaccine.
“The last factor is likely to lead to a surge in freight rates in which SIA could benefit due to Singapore’s status as a transhipment hub. Similarly, we believe that as demand for travel rises, ticket prices are likely to rise sharply. While it is impossible to accurately estimate the impact, we believe the upside risk is greater,” he surmises.
The upgrade, Ajith admits, is a non-consensus call, but he believes it is an “opportune” time to add positions in the company.
“We now value SIA at 0.9x (previously 0.8x) FY21F book value, according the company the same P/B valuation as Cathay Pacific Airlines (CX). We have also factored in additional dilution arising from the issuance of new mandatory convertible bonds,” he adds.
Shares in SIA closed 4 cents higher or 1.1% up at $3.62 on Oct 26.
