Singapore Airlines (SIA) - CGS-CIMB Research 2020-03-12: MTM Losses & COVID-19 To Hit Balance Sheet

SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Airlines (SIA) - MTM Losses & COVID-19 To Hit Balance Sheet

SIA's share price has gone below its sustainable long-term valuation, in our view, even after taking into account the damage wrought by Covid-19.
After taking into account MTM losses on its fuel hedges, we cut our target price to S$8, still based on P/BV of 0.86x (1 s.d. below average since 2011).

We reiterate HOLD, as the spread of Covid-19 to the US and Europe may hurt Singapore Airlines (SIA, SGX:C6L)’s long-haul routes, and SIA's share price may still fall in the short term.

The Covid-19 pandemic is spreading rapidly in Europe, and the whole of Italy has been locked down, with cases in the US also rising quickly. European flights currently account for 31% (the single-largest share) of SIA’s mainline (SIAM) available seat kilometre (ASK) capacity, with US flights at 14%. Demand for travel to SW Pacific has also been hurt, affecting 23% of SIAM’s ASK deployment, while demand to NE Asia (14% of ASK) and South Asia (7% of ASK) has also been hurt. SIA mainline and SilkAir combined have cut 15.6% of their ASK capacity for Feb-May 2020, but this is probably lagging the actual demand contraction. We view the global spread of Covid-19 with alarm as the sharp fall in demand for SIA’s regional flights will now spread to its long-haul flights and, in the process, hurt the take-up rate of lucrative business and first class cabins.

The impact on SIA group’s earnings is hard to estimate accurately, as it will depend on the duration and magnitude of the pandemic, and how long it will take to be controlled. The assessment of one expert in Singapore that ‘the virus is here to stay until end-2020’ is bad news for SIA. It would appear, in our view, that the ‘all-clear’ sign is still months away, hence investors may remain cautious even at the current low share price levels.
Our forecasts assume that the SIA group will continue to see lower y-o-y capacity, demand, load factor and yields in FY21F, and we think that core net profits will be suppressed at the S$200m-250m level for both FY20F and FY21F, before a sharp rise to above S$600m in FY22F, assuming that there are no further shocks.

We estimate a S$1.9bn balance sheet hit in 4QFY20F from mark-to-market (MTM) losses on SIA’s outstanding fuel hedges, which have been contracted for the next five years.
The MTM losses are calculated using the Brent crude forward price curve as at 12pm GMT+8 (spot price of US$34/bbl, per-barrel average forward price for FY21-25F of US$40, US$45, US$50, US$51, and US$53, respectively). The estimated MTM loss will reduce our end-Mar 2020F BVPS to S$8.71 (from S$11.23 as at 31 Mar 2019). Our end-Mar 2021F BVPS rises to S$9.33, on the assumption of a US$5/bbl rise in the forward curve, against which we apply a P/BV of 0.86x (1 s.d. below the average since 2011), to derive our target price of S$8.
As at 2pm today, SIA's share price of S$7.38 is trading at 0.72x its end-Dec 2019 historical BVPS of S$10.26, below the long-term P/BV trough of (2 s.d. below the average).
See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.
See also the summary of CIMB analysts' target entry prices for STI constituents in report: Singapore Strategy - CGS-CIMB 2020-02-12: Going Into Deeper Value Zone.

Raymond YAP CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-12

SGX Stock Analyst Report HOLD MAINTAIN HOLD 8.00 DOWN 8.460