Singapore Airlines (SIA) - CGS-CIMB Research 2020-05-15: Opportunity To Accumulate

SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Airlines (SIA) - Opportunity To Accumulate

SIA's full-year core net loss of S$127m outperformed our S$140m core net profit forecast if we add back S$710m in unrealised MTM losses on fuel hedges.
The outperformance was due to a sharp S$500m (-65% q-o-q) drop in staff costs, which exceeded our expectations.
Upgrade from Hold to ADD as the deeply-discounted share price may recover once Covid-19 outbreak eases; target price raised to S$4.60 (0.84x P/BV).

Singapore Airlines (SIA, SGX:C6L) reported a core net loss of S$699m for 4QFY20 and a full-year core net loss of S$127m.
SIA typically accounts for unrealised MTM hedging gains and losses on its fuel derivatives on its balance sheet and only recognises realised hedging gains/losses on its P&L. However, in 4QFY20, SIA charged S$710m in unrealised MTM fuel hedging losses from the FY21F hedge book into its P&L, representing the excess of the barrels hedged compared to the expected consumption.
If we add this back to derive the ‘actual’ operating performance, SIA would have been approximately breakeven in 4QFY20 and still profitable for FY20, in part due to the aggressive cost cuts. Salary costs, for instance, fell 65% q-o-q, or S$500m, to just S$274m in 4QFY20 due to a combination of pay cuts, reduced flying allowances and voluntary/involuntary no-pay leave.
Still, this does not hide the tough conditions facing the group as the combined passenger business saw RPK demand contract 23% y-o-y and yields fall 6.4% y-o-y in 4QFY20, with MI and TR in the red and SQ merely breakeven (after adding back the unrealised MTM losses). The stronger cargo yields certainly helped SQ, although this was mostly offset by lower cargo volumes.

We have reduced our FY21F core net loss estimate from S$957m to S$720m as the MTM fuel hedging loss of S$710m charged into the FY20 P&L means that an equivalent value will no longer be charged into the FY21F P&L unless, of course, the Brent forward curve falls further from the end-Mar 2020 level.
However, if the OPEC+ oil production cuts succeed in increasing oil prices, SIA will benefit from MTM fuel hedging gains on the over-hedged portion, which will be booked in the FY21F P&L. Meanwhile, SIA will remain fully hedged on its now-reduced FY21F fuel requirements and is therefore not expected to suffer any economic loss on this effective portion of the hedge even if spot oil prices increase. In other words, if oil prices increase, MTM fuel hedging gains may help SIA improve its FY21F P&L performance, which may surprise the market positively.
There are many uncertainties, however, and we now assume that SIA’s combined passenger airline business will see a 57% y-o-y RPK decline in FY21F vs. our previous -43% assumption.
Yield decline assumptions also remain highly judgmental at this point but, with the SIA share price trading at 0.69x historical P/BV, below even the P/BV of 0.74x that is 2 s.d. below the mean, a lot of negative news appears to be priced in.
Investors with a high risk tolerance and a one-year investing horizon can accumulate SIA for the eventual relaxation of Covid-19 restrictions and a share price relief rally.

Our target price of S$4.60 remains based on 0.84x P/BV, using 1 standard deviation (s.d.) below the mean since 2011.
We have applied this multiple against the end-FY22F book value per share (BVPS) of S$5.47 because we expect SIA to report losses in both FY21F and FY22F. Hence, we have used the lowest possible BVPS in our forecast period to incorporate a margin of safety.
Our BVPS also treats half of the S$3.5bn Mandatory Convertible Bonds (MCB) as debt (although the accounting treatment sees it as wholly equity) because we have assumed that SIA will endeavour to redeem half of the MCBs before their 10-year maturity or will refinance them using other sources of debt.
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 Fig3 in attached PDF report for details on calculation of SIA's ex-rights target price.

Raymond YAP CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-15

SGX Stock Analyst Report ADD UPGRADE HOLD 4.60 UP 4.450