Singapore Airlines (SIA) - DBS Research 2020-07-29: Well Stocked For A Long Winter; All Eyes On COVID-19 & Its Containment

SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Airlines (SIA) - Well Stocked For A Long Winter; All Eyes On COVID-19 & Its Containment

Projecting S$2.2bn loss for Singapore Airlines in FY21 as we assume international air travel to normalise only in mid-2021.
An effective COVID-19 vaccine by early 2021 would help international air travel to recover.
S$8.8bn fund raising has strengthened the group’s balance sheet to weather the current crisis.
Maintain HOLD, our Target Price of S$3.75 (post rights issue) is based on 0.8x blended FY21/22F P/B.

The number of daily new cases of COVID-19 infections continues to rise with the 7-day moving average now above 250,000. Given the wide and varying degrees of success in flattening the curve or managing the outbreak among various countries, we believe that international air travel demand could take up to a year to gradually recover to pre-COVID-19 levels. Accordingly, we have cut our earnings forecasts for Singapore Airlines (SGX:C6L) to S$2.2bn loss for FY21 before we see a rebound to S$470m profit in FY22.
With 6 vaccine candidates already in clinical trials-phase 3, there is cautious optimism that a vaccine can be developed by early 2021, paving the way for international air travel to then recover.

The number of daily new confirmed cases of COVID-19 globally continues to rise with the 7-day moving average now at 250,000 daily new cases since 25 July while many countries, led by the U.S., have already eased off on social distancing rules ahead of seeing a decline in infections.
Given the wide and varying degrees of success in flattening the curve or managing the outbreak among various countries, we believe that international air travel demand could take up to a year to gradually recover to pre-COVID-19 levels as:
1. governments will be cautious in opening up borders to regions with relatively high infection rates or implement restrictive measures such as quarantine requirements or tests, and
2. consumer confidence and demand to travel remains relatively low as the number of new cases continues to stay high.

As of 28 July, WHO reported that there were 6 COVID-19 candidate vaccines already in clinical trial phase 3, underpinning optimism that an effective vaccine can be developed by the end of 2020 or early 2021. Once the wider population is inoculated, it should pave the way for international air travel demand to recover.

With Singapore Airlines’s passenger traffic tumbling by over 99% in the months of April to June on capacity decrease of over 95%, the company’s first quarter core operating results is likely to be abysmal. We adjust our assumptions to factor in a slower rate of recovery in passenger travel in the quarters ahead, and we now assume normalisation of travel demand by mid-2021 versus end 2020 previously. Hence, we now project Singapore Airlines’ overall revenue in FY21 to decline by 61% y-o-y to S$6.3bn on passenger capacity cut of 63% y-o-y, and with operating losses of S$2.2bn (versus our previous forecast of S$1.3bn operating loss).
The forecasted loss for FY21F would be even more if we include the S$710m from ineffective fuel hedging that was already booked in 4QFY20.

Assuming a gradual recovery as international travel restrictions are slowly lifted from July onwards and a full recovery only by July 2021, we project passenger demand to decline by 66% y-o-y in FYE Mar '21 for Singapore Airlines before recovering by 178% in FY22. Hence, we project 61% y-o-y decline in overall revenue for Singapore Airlines for FY21 to S$6.3bn and an increase in net losses to S$2.2bn in FY21 vs. a loss of S$212m in FY20.
Net earnings are projected to rebound to a positive S$470m in FY22 assuming air travel demand can fully recover by mid-2021. This means that our profit forecast for FY21 is below consensus estimate of a S$1.6bn loss, but we have a higher than consensus profit estimate of S$260m for FY22.

On 5 June, Singapore Airlines completed a fund-raising exercise of c. S$5.3bn in equity via a rights issue as well as c. S$3.5bn in Mandatory Convertible Bonds (MCBs), which will also be accounted for as equity, for a total of S$8.8bn in gross proceeds. Excluding the MCBs, this raises Singapore Airlines’ shareholders’ equity from S$9.3bn at the end of March 2020 to S$13.1bn and to S$16.6bn if we include the MCBs as equity. Following this fund-raising exercise, Singapore Airlines' net debt to equity ratio drops from 0.9x as at end FY20 to just 0.1x as at end FY21F, assuming the MCBs are accounted for as equity.
See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.

Paul YONG CFA DBS Group Research | https://www.dbsvickers.com/ 2020-07-29

SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.75 DOWN 6.600