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

SINGAPORE AIRLINES LTD (SGX:C6L)

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.

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.

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).

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.

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.

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.

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.

We raise our Singapore Airlines' net loss estimate for FY21 to S$3.3b from S$1.6b, after factoring in S$1b in impairment and lower load factors.
Upgrade to HOLD with a target price of S$3.64. While, we have doubled our full-year loss estimate, we believe that most of the known negatives are reflected in the stock price. We have assumed that traffic will rebound sharply in 2HFY22 as vaccines are rolled out.
We now value Singapore Airlines at 0.85x FY21F book value and have factored in the dilution from the conversion of the MCB into equity. Suggested entry level is S$3.20 or 0.75x FY21’s book value.
See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.
SIA share price catalyst: Reduction in rate of COVID-19 infections and implementation of a vaccine.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-08-03

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