Singapore Airlines (SIA) - CGS-CIMB Research 2020-07-30: Surge In COVID-19 Cases Hampers Recovery; Downgrade To HOLD


Singapore Airlines (SIA) - Surge In COVID-19 Cases Hampers Recovery

  • SIA's 1QFY3/21 (April 2020 to June 2020) core net loss of S$1bn was significantly higher than our previous FY21F core net loss estimate of S$720m (consensus: S$1.9bn loss).
  • We reverse our short-lived ADD call back to a HOLD rating as the surge in global COVID-19 cases has put paid to our hopes of a quick recovery.
  • Our target price, still based on 0.84x P/BV on the FY22F adjusted BVPS, has been lowered to S$3.55 due to a significant widening of our loss forecasts.

SIA reported large 1QFY3/21 net loss, but not as bad as it looks

  • Singapore Airlines (SIA, SGX:C6L) reported a net loss of S$1,123m for 1Q21 (April 2020 to June 2020), due to an almost 100% drop in pax carried across the FSC and LCC airlines due to COVID-19 lockdowns and border closures, but partially offset by a comfortable increase in cargo revenues and profits.
  • All three passenger airlines – SIA mainline, SilkAir and Scoot – made large operating losses, but the cargo operations delivered a S$332m EBIT, up almost 10-fold on account of higher cargo yields amid a rush of global shipments of personal protective equipment and pharmaceuticals.
  • Aggravating the group loss was SIA’s share of NokScoot’s impairment on its legacy 777 planes totalling S$127m; stripping this out, the 1Q core net loss was S$1bn, which included S$464m in mark-to-market (MTM) losses on ineffective fuel hedges, but also c.S$200m in government jobs support scheme (JSS) receipts.

We forecast S$2.4bn core net loss for FY21F…

  • Removing the latter two items, we end up with a 1Q loss of S$743m, or a loss of S$3bn annualised. Adding back our estimate of S$267m in full-year JSS receipts, we end up with a back-of-the-envelope core net loss forecast of S$2.7bn.
  • We are not deducting the MTM losses booked in 1Q, because rising oil prices may actually help SIA book MTM gains in future quarters that could reverse the 1Q MTM losses. Our new core net loss forecast for FY21F is now S$2.4bn, closely matching our estimate above, and making allowance for some improvement in pax traffic over the next three quarters.

… reflecting large downgrades in capacity and traffic assumptions

  • Our core net loss forecasts for FY21-23F have been widened significantly, because our old assumptions on pax traffic recovery look increasingly improbable in light of the still-worrying levels of COVID-19 infections in major markets for SIA such as Indonesia, India, Australia, Hong Kong and the US, and the reluctance of countries to open their borders prematurely.
  • We had earlier expected FY21F ASK capacity to be c.45% of the baseline in FY20, with FY22F at 75% and FY23F at 90% of the baseline. We have now revised the ASK forecasts to 10%, 50% and 70% of the FY20 baseline in FY21F, FY22F and FY23F, respectively.
  • Long-haul travel on SIA mainline will likely take longer to recover than medium-haul travel, which in turn may take longer to recover than short-haul travel on SilkAir and Scoot. This is a major challenge for SIA, as the long-haul operations generate the biggest chunk of profits and employ the most expensive assets. SIA is undergoing an asset impairment review, and may book a S$1bn impairment on its 19-strong A380 fleet as well as additional impairments on the values of older-generation planes.

Note on fuel hedging MTM losses

  • SIA typically recognises only realised MTM fuel hedging gains/losses in the P&L, with unrealised MTM gains/losses booked in balance sheet reserves.
  • The collapse in demand and the substantial cut in capacity mean that SIA does not foresee requiring the same number of oil hedges that it had contracted. The excess barrels can no longer be considered as hedges, hence the unrealised MTM gains/losses on those excess barrels can no longer be booked in balance sheet reserves. Instead, unrealised MTM gains/losses on those excess barrels must be booked into the P&L immediately.
  • The value of the unrealised MTM gains/losses on the excess barrels is re-measured quarterly, based on the prevailing forward oil price curve, with the difference booked into the P&L. The quarterly re-measurement of the unrealised MTM gains/losses on ‘real’ fuel hedges will continue to be booked into balance sheet reserves.
  • During 4QFY20, SIA booked S$710m in unrealised MTM losses on the fuel hedges that were expected to be in excess of its actual requirements in FY21F.
  • During 1QFY21, SIA booked a further S$464m in unrealised MTM losses on excess hedges, which we believe comprise two separate components that were netted off:
    1. Unrealised MTM gains on excess FY21F hedges, given that Brent crude oil prices doubled between 31 March and 30 June 2020, hence requiring a re-measurement of the unrealised MTM losses that were originally booked in 4QFY20; and
    2. Unrealised MTM losses on the fuel derivatives that are in excess of its actual requirements for FY22F. During the 1Q, SIA revised lower its estimates for capacity restoration in FY22F, resulting in a decline in forecast oil consumption. The unrealised MTM losses on the over-hedged position with respect to FY22F was recognised in 1QFY21 by way of a charge in the P&L.
  • More unrealised MTM losses on the fuel derivatives can make its way into the P&L if SIA again revises down its forward capacity estimates and oil consumption forecasts. Conversely, the unrealised MTM losses can be revised lower if oil prices increase, resulting in a credit to the P&L that would boost quarterly earnings.

SIA target price computation

  • Our target price of S$3.55 for SIA 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 adjusted end-FY22F book value per share (BVPS) of S$4.22. See PDF report attached below for more details.
  • 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.
  • Upside risks: stronger-than-expected recovery in passenger traffic following a quick containment of the global COVID-19 epidemic, and higher-than-expected cost savings as a result of urgent efforts to contain costs.
  • Downside risks: longer-than-expected shutdown in global international travel as various countries keep the travel bans and restrictions on inbound tourists in place in order to prevent imported cases of COVID-19.

Raymond YAP CFA CGS-CIMB Research | 2020-07-30
SGX Stock Analyst Report HOLD DOWNGRADE ADD 3.55 DOWN 4.600