Singapore Airlines - UOB Kay Hian 2020-08-03: 1QFY20 Loss Within Expectation But SIA Expects A Slower Traffic Recovery


Singapore Airlines - 1QFY20 Loss Within Expectation But SIA Expects A Slower Traffic Recovery

  • We now expect full-year losses to double our previous estimate, in part due to the guidance of S$1b in impairment for surplus aircraft as well as slower capacity growth for FY21 and FY22.
  • The key bright spots are a doubling in pax yields, which suggests that airlines will have pricing power when traffic rebounds, as well as strong cargo yields and revenue.
  • Another potentially bright spot is a delay in aircraft deliveries and capex.
  • We now value Singapore Airlines at 0.85x FY21F’s diluted book value and derive a fair value of S$3.64.
  • Upgrade to HOLD. Suggested entry level S$3.20.

Singapore Airlines 1QFY20 Results

1QFY21 loss was broadly in line; excluding ineffective hedges, SIA was likely to have been EBITDA positive.

  • Singapore Airlines (SGX:C6L) had warned earlier that it will close out part of the its fuel hedges due to a reduction in capacity and this led to S$464m in ineffective fuel hedging. Excluding that, we estimate that Singapore Airlines would have been EBITDA positive for the year (approximately S$40m).
  • Cargo operations were the sole bright spot and accounted for 78% of Singapore Airlines’ revenue for the period, with the carrier deploying 33 of its passenger aircraft for cargo only services. Cargo yields rose a whopping 174% y-o-y in 1Q20, due to a shortage of bellyhold capacity and strong demand for personal protection equipment.
  • Group-wide non-fuel cost fell 54% y-o-y for the period, lower than the 79% decline in revenue. The reduction was also aided by wage credits from the Job Support Scheme.
  • Pax yields doubled for the parent airline and SilkAir, but it was still in the red as breakeven level was still at 149% vs load factors of 10.8% due to low capacity utilisation and relatively high fixed costs.

Cash burn likely to be higher than initial estimate.

  • After adjusting for non-cash items and factoring in lease payments, we estimate an operating cash flow deficit of about S$200m.
  • As at 1QFY21, Singapore Airlines had S$9.6b in cash, a S$6.9b increase from 31 March. Factoring in the S$8.8b in rights issue, a repayment of S$2.0b in bridging facility, short-term loans of S$0.5b as well as S$1b in secured loans, the cash burn for the period would approximate S$1.4b (we had previously assumed that the secured loans were not included in 1QFY21’s cash flow).

Guides for about S$1b in impairment on surplus A380 aircraft and in discussions to delay deliveries and pre-delivery payments.

  • The carrier has 19 A380’s of which 5 are on operating leases. We have now factored the non-cash impairment charges in FY21’s earnings estimates. Singapore Airlines guided that they have completed discussions with Airbus and discussions are currently on-going with Boeing.
  • Singapore Airlines had previously guided for S$5.3b and S$5.7b in capex for FY21 and FY22 respectively. We now assume that capex for FY21 and FY22 would be halved from prior guidance.

Downgrades recovery trajectory. Expects 2-4 years for passenger traffic to recover to pre-pandemic levels.

  • Singapore Airlines also guided that capacity by end-2QFY21 would likely be at just 7% of pre-pandemic levels. We have assumed that group capacity for FY21 and FY22 would be at 11.7% and 33% of pre-pandemic capacity levels.

Holding out for border re-openings and a vaccine for COVID-19.

  • Not surprisingly, the demand outlook has worsened given increasing concerns over a second wave of infections and risk of quarantine measures. IATA estimates that traffic will only return to pre-pandemic levels by 2024. However, until COVID-19 infections drastically slow down across the globe and vaccines are widely available, confidence in travel is likely to remain muted.

Will SIA exercise the option for further S$6.2b in mandatory convertible bonds?

  • Singapore Airlines has until next June to decide if it would exercise the option, but secured borrowings would certainly be a cheaper funding option and would not be dilutive to shareholders. Thus, Singapore Airlines’ investment merit would only be clearer as we draw into late-4Q20 and early-1Q21. If pax load factors improve to above 40%, then the odds of further Mandatory Convertible Bonds (MCB) issuance would be reduced.

Singapore Airlines - Valuation & Recommendation

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-08-03
SGX Stock Analyst Report HOLD UPGRADE SELL 3.64 DOWN 3.800