Singapore Airlines (SIA) - CGS-CIMB Research 2020-05-06: Widening Loss Forecast For FY21F


Singapore Airlines (SIA) - Widening Loss Forecast For FY21F

  • The rate of new Covid-19 infections remains high globally and Singapore remains cautious about the reopening of international air travel.
  • We widen our FY21F core net loss forecast from S$175m to S$957m as pax travel demand may take longer than expected to recover.
  • Reiterate HOLD but increase our target price to S$4.45, based on 0.84x P/BV (1 s.d. below mean), with the MCBs treated as half debt and half equity.

Passenger (pax) air travel may take longer than expected to recover

  • Singapore’s National Development Minister Lawrence Wong said recently that Singapore was working with Australia, Canada, South Korea and New Zealand to facilitate the opening of cross-border essential travel and may allow travel to specific cities in China, like Beijing and Shanghai. While we view this development positively, travel demand may recover more slowly than expected due to health and infection fears. Many countries are also keen to maintain strict border controls for still-undetermined periods of time.
  • The two full-service carriers in the Singapore Airlines (SGX:C6L) group, SIA mainline (SQ) and SilkAir (MI), cut 96% of capacity in 1QFY21F (Apr-Jun 2020F). For 2QFY21F (Jul-Sep 2020F), we previously forecast that pax volumes would only be 12% lower y-o-y across the group, including Scoot (TR), but we revise our estimate to a 60% y-o-y decline as we do not believe the q-o-q demand recovery will be as sharp as expected previously.
  • For 3QFY21F (Oct-Dec 2020F), we now assume a 30% y-o-y pax decline vs. a 5% y-o-y pax increase previously. And for 4QFY21F (Jan-Mar 2021F), we now assume a slightly slower growth rate of 25% y-o-y vs. 30% y-o-y previously.
  • For FY21F as a whole, our pax traffic forecast is now for a 43% y-o-y full-year decline vs. a 19% y-o-y decline previously. As a result, our FY21F core net loss forecast is widened from S$175m to S$957m (consensus: S$720m loss).

Calculation of SIA's ex-rights target price

  • Our target price is based on a P/BV multiple of 0.84x (1 s.d. below mean) vs. 0.86x previously as the outlook remains very challenging and uncertain and shareholder returns are expected to be low for the foreseeable future.
  • Our BVPS forecast for end-FY21F is S$5.89, after deducting the widened loss forecasts and the MTM losses for SIA’s out-of-the-money fuel hedges but after including the new equity rights issue (S$5.3bn) and the issue of Mandatory Convertible Bonds (MCB, S$3.5bn), which the accounting standards treat as equity. However, for the purposes of deriving our target price, we have assumed that half of the MCBs is akin to debt as we believe SIA will endeavour to redeem at least some before its 10-year maturity, resulting in a lower BVPS of S$5.30.
  • Applying a target P/BV multiple of 0.84x on our revised BVPS of S$5.30 results in a price target of S$4.45. Our old ex-rights target price of S$4.25 (cum-rights equivalent of S$6.27, as noted in our 27 Mar report Singapore Airlines (SIA) - CGS-CIMB Research 2020-03-27: Capital Raising To Strengthen SIA For Long Haul; Strong Shareholder Backing To Support Revival) was based on the presumption that SIA will ultimately redeem all of the MCBs so we previously treated the MCBs as entirely debt. See attached PDF report for details on calculation of SIA's ex-rights target price as well as upside and downside risks to Singapore Airlines share price.
  • We now believe that this assumption may be too conservative as SIA may choose to refinance some of the MCBs using newly issued debt when conditions to raise new debt financing improve.
  • See also SIA Share Price; SIA Target Price; SIA Analyst Reports; SIA Dividend History; SIA Announcements; SIA Latest News.

Raymond YAP CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-06
SGX Stock Analyst Report HOLD MAINTAIN HOLD 4.45 DOWN 6.270