SINGAPORE (Feb 7): Amid the increasing spread of the novel coronavirus, shares of Singapore Airlines (SIA) are trading at a decade-low. The national flag carrier fell 5.4% year-to-date to close at $8.55 on Feb 4, or 14.6 and 0.9 times earnings and book value, respectively. At that price level, the stock is approaching its 2009 low of $8.21 in the wake of the global financial crisis. The counter is also now trading closer to its 2003 low of $7.78 during the outbreak of SARS.
The drop in the SIA share price is hardly surprising at all. China first imposed restrictions on outbound group travel on Jan 27. Then, on Feb 1, Singapore put in place restrictions on the arrival of all China passport holders and foreigners from China.
According to Lawrence Wong, co-chair of the multi-ministry coronavirus taskforce, there are typically 14,000 Chinese travellers flying from China to Singapore every day. However, “this number fell sharply by more than 80% – just through the Chinese measures alone”, says Wong, who is also Minister for National Development.
In light of this, SIA and its subsidiary airlines – SilkAir and Scoot – have reduced the frequency of flights to and fro China for February and March. Other airlines such as British Airways, Cathay Pacific Airways, Delta Air Lines, Etihad Airways, Qantas Airways and Qatar Airways have also suspended services to China. Even logistics service provider United Parcel Service has cancelled 22 of its cargo flights to China, partly due to the ordinary manufacturing closures amid the Lunar New Year celebrations.
On Feb 5, Cathay Pacific gave its 27,000 employees the option to take three weeks of unpaid leave. The airline is also seeking price reductions from suppliers, halting recruitment efforts, delaying major projects and cancelling all non-essential expenditure, according to Reuters, based on a video message by Cathay Pacific chief executive Augustus Tang to staff.
Will SIA and its subsidiary airlines suspend more flights ahead and ask their staff to take unpaid leave? “We are monitoring the situation closely and it is too early to assess the impact on our operations,” an SIA spokesperson tells The Edge Singapore. When asked to give an assessment of how the top and bottom lines will be affected, the spokesperson adds that it is “too early” to do so.
Analysts, unsurprisingly, are negative. According to a Feb 4 report by UOB Kay Hian, SIA could see red in 4QFY2020 and earnings of $483 million, down 29% y-o-y, in FY2020 ending March 31 as its passenger traffic is expected to decline 10% from February to end-March. This is compounded by a “greater” reduction in passenger traffic for SilkAir and Scoot, as both carriers have a larger share of flight capacity to China. In addition, SIA’s yields could be affected due to a decline in corporate travel, where flying business class remains a common perk for executives.
DBS Group Research analyst Paul Yong warns that SIA’s passenger load and yield are likely to come under “pressure” in the near term. But he says he has yet to update his financial projections for the company, pending the release of its 3QFY2020 results ended Dec 31. “We would – as most of the research coverage – probably look to adjust our numbers after the briefing,” he tells The Edge Singapore.
Over the medium-to-long term, SIA is facing intense competition from the Gulf and Chinese carriers, which are expanding aggressively, notes Yong. This is on top of the indirect competition from budget carriers, which appeal to passengers who do not mind giving up the frills in return for a cheaper fare.
Still, Yong is confident of SIA’s long-term prospects. Rare among its peers, SIA has yet to suffer a full-year loss. SIA has also progressed well into the third year of its transformation programme, notching up higher load factors in the last two to three quarters, he adds. Moreover, the company has managed to keep costs down. “So I think SIA has proven itself to be able to steer and [navigate] through all sorts of [adversities],” he says.
So, is now a good time to accumulate shares in SIA? Or will the stock continue to fall? Yong thinks that SIA is at, or near its bottom. He figures that the “appropriate” time to buy the stock is when news on the coronavirus begins to turn more positive. This could either be a reduction in new cases or an easing of travel bans by the authorities. “Those are probably the signals that you want to look at to start buying in. As we learned from SARS, the share price will rebound. It is just a matter of when,” says Yong. He adds that if the coronavirus can be contained quickly, the rebound in travel demand should come quickly too.
UOB KayHian has a “hold” rating for SIA with a target price of $9.10. Yong, meanwhile, has a “buy” recommendation for the stock with a target price of $10.40, which was issued prior to the coronavirus outbreak.
