Singapore Airlines (SIA) - UOB Kay Hian 2020-05-18: At Critical Crossroads, But Negatives Fully Priced In

SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Airlines (SIA) - At Critical Crossroads, But Negatives Fully Priced In

A large part of the expected demand destruction has been priced in at current levels. The positives such as SIA’s ability to sell or lease back unencumbered aircraft or a recovery in fuel prices as businesses resume have not been factored in yet. The latter will aid book value recovery, while the former will reduce SIA’s need for further capital.

While a recovery in air travel will be gradual, we believe that confidence will rise once a vaccine for COVID-19 is implemented.
We value SIA at 0.8x FY21F’s diluted book value and derive a fair value of S$4.34. Upgrade to BUY.

The variance was due to recognition to S$710m in ineffective fuel hedging loss in 4QFY20, offset partially by a higher-than-expected decline in staff cost (-62% y-o-y) for the same period, aided partially by government grants. Pax yield also declined by a whopping 6.9% y-o-y during the period.
As expected, SIA (SGX:C6L) did not declare a final dividend. See Singapore Airlines Dividend History. SIA still managed to generate positive OCF before working capital of S$581m in 4QFY21.

This was despite a 96.6% decline in capacity. Traffic however, declined by a greater quantum of 99.6%. We believe the decline in load factor was due to the addition of flights to bring Singaporeans back home.

SIA indicated that pax aircraft are being utilised to carry essential cargo, such as pharmaceutical products.

We also believe that load factors would be below 70% for the full year as demand is likely to recover first for short-haul routes rather than long haul routes.

Total aircraft capex and pre-delivery payments were lowered by just S$600m for the next three years and still could amount to S$14.9b. Non-aircraft related capex was lowered by S$200m to S$800m for the next 3 years.
We have assumed that SIA will also sell and leaseback aircraft for approximately S$400m and have also assumed further asset disposal of S$2.9b. Excess capacity remains a key risk for SIA over the next 2 years even if traffic recovers.

Even if there is a recovery, it would be more skewed towards short-haul routes, rather than long haul routes. As such, SIA would face significant challenges in adjusting capacity to maximise load factors and revenue.
Next, there is uncertainty in terms of extent of yield erosion. Front-end cabin seats might still be in high demand as there would be customers who would seek greater isolation but yields are likely to be low.

Over the next 5 years, SIA would have S$23.5b in capex, which approximates its current fleet value. We believe the fleet renewal programme is excessive and detrimental to the balance sheet, even pre-COVID-19.
We believe the best way to enhance shareholder value would be for SIA to sell aircraft as the market improves in 1-2 years or if that fails, monetise unencumbered aircraft with attached leases.

We raise our net loss estimate for FY21 by S$1.2b, after lowering capacity assumptions.
Despite the expected losses, we expect:
1. SIA’s book value to decline only marginally post-rights;
2. MCB as part of the S$2.6b losses in fair value losses to be transferred to P&L; and
3. an upward revaluation of existing hedges.
We have also treated 50% of the mandatory convertible bonds (MCB) as equity and value the diluted FY21F’s book value at 0.8x, vs 1.0x previously.
See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-05-18

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