Singapore Airlines (SIA) - OCBC Investment 2020-03-20: Travel Demand Hit Hard By COVID-19


Singapore Airlines (SIA) - Travel Demand Hit Hard By COVID-19

  • 50% cut in capacity till end-Apr.
  • Further reductions possible should COVID-19 escalate.
  • Cautious on earnings outlook.

COVID-19 spread intensified across the globe

  • Singapore Airlines (SGX:C6L) announced further reductions in capacity, due to weaker demand across the group’s networks and wider border controls amid the COVID-19 outbreak. As of 17 Mar, COVID-19 has spread rapidly to over 150 countries with more than 190,000 confirmed cases globally.
  • World Health Organisation declared COVID-19 a global pandemic due to its rapid and wide transmission and severity.
  • More than 65 countries across the globe have imposed travel restrictions or lockdown of the countries to combat the spread of COVID-19.

Further reductions in capacity amid weak demand and wider border controls

  • Till date, Singapore Airlines has announced six rounds of capacity cut since February. With the latest reductions announced, the group has temporarily cut a total of 50% of its capacity from its network till end-April. Notably, the latest announcement saw a sharp increase of 34.4 percentage points from the last announcement on 12 March, underscoring the severity and escalation of the COVID-19 situation.
  • Management highlighted the possibility of more reductions in future and to be “prepared for a prolonged period of difficulty”.

Rigorous cost-management

  • Singapore Airlines has been proactively looking at ways to control costs. Senior management and board members will take a 5-15% cut in salary to reduce staff costs. Singapore Airlines also announced a voluntary no-pay leave scheme for staffs below senior management level to reduce manpower costs. Moreover, Singapore Airlines is discussing with suppliers to get discounts and revisit the repayment schedule including the deferrals of aircrafts prepayment.
  • Management noted that Singapore Airlines is currently in discussion with the banks to secure more lines of credit to make sure that they have enough cash to meet near-term liquidity requirement. Management noted that the banks have been supportive thus far.
  • We note that Singapore Airlines’s balance sheet remains stable with ~52% of net gearing ratio and S$1.5-2b of un-drawn credit lines.
  • Singapore Airlines is trading at 0.6x P/B, 26% lower than the GFC lows. While valuations look attractive, we would continue to see volatility ahead, growing pressure on load factors and yields. As such, we remain cautious on Singapore Airlines and would watch out for signs of stabilisation, e.g declining trend of new COVID-19 cases before reviewing our rating.
  • We update our cost assumptions and pare our earnings forecast for FY20/21F by 55% and 39% respectively to take into account the impact of COVID-19 which is likely to last longer till 3QFY21. After adjustments, our fair value estimate decreases from S$9.90 to S$6.60.
  • See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2020-03-20
SGX Stock Analyst Report HOLD DOWNGRADE BUY 6.60 DOWN 9.900