Singapore Airlines - CGS-CIMB Research 2020-10-26: No Urgency (Yet) To Add SIA Shares


Singapore Airlines - No Urgency (Yet) To Add SIA Shares

  • The cautious border re-openings, and high COVID-19 cases in neighbouring countries (as well as Europe and the US) have hampered Singapore Airlines (SIA, SGX:C6L)’s recovery.
  • We expect another poor operating result for SIA's Sep 2020 quarter, with at least S$1bn of impairments on its A380s and classic 777s.
  • Maintain HOLD with a higher target price.

International travel continues to be curbed globally

  • While Singapore has largely contained its COVID-19 outbreak and is cautiously reopening its borders, there seems to be an abundance of caution among governments elsewhere that may delay the full reopening of borders to non-essential, leisure travel. Furthermore, the pandemic is seeing resurgence in some neighbouring countries such as Malaysia, and has not been effectively controlled in India, Indonesia and the Philippines, which were erstwhile the source of a lot of transfer traffic at Changi airport.
  • Farther away, the high number of cases in certain parts of Europe and the US also prevent SIA from resuming its hub-and-spoke air transportation business model; origin and destination traffic only produce a limited number of passengers given Singapore’s small size.

How badly has COVID-19 impacted SIA ?

  • See PDF report attached below for analysis and detailed statistics.

Baby steps to resuming travel would not move the needle very far

  • Singapore has initiated reciprocal green lane arrangements with several countries for official and business travel without requiring quarantine, but passenger numbers are naturally low given the paperwork involved and the necessary sponsorships. Unrestricted general travel into Singapore has been unilaterally initiated with several small countries, with no quarantine and no itinerary restrictions, but the foreign countries are not reciprocating Singapore’s moves, with the possible exception of Hong Kong.

We forecast SIA to be loss-making for the next 3 financial years

  • We think investors should stay on the sidelines on SIA shares, with key catalysts for us to be more constructive being the emergence of widely-available COVID-19 vaccines. This is not likely to be available until 1HCY21, based on World Health Organization guidance. IATA expects a full recovery of passenger demand to the 2019 baseline only in 2024.
  • Meanwhile, we expect SIA to deliver a very poor set of Sep 2020 quarter results (to be reported in Nov), with a second-consecutive quarter of 98-99% y-o-y drop in demand. SIA guided on 29 Jul that its group passenger ASK capacity “may reach less than half of its pre-COVID-19 levels” by the end of Mar 2021.
  • SIA’s largest A380s (and oldest 777s) are likely to be impaired by at least S$1bn according to SIA in the September 2020 quarter results; while non-cash in nature, the impairments reflect difficulties in finding profitable employment for the A380s in the medium-term.
  • As Brent crude oil prices did not move much from the US$40-41/bbl level between 30 Jun and 30 Sep 2020, SIA did not benefit from any mark-to-market gains on fuel derivatives in excess of its actual requirements. SIA had purchased Brent forwards for the next 5 years, with mark-to-market fuel derivative losses of c.S$2.6bn.
  • Certainly, the continued global border closures and the limited levels of travel allowed between Singapore and other countries suggest that “half” or even close to half, may be too ambitious a target, in our view.

SIA's plan of action to survive the pandemic

  • Equity capital raising,
  • Debt capital raising,
  • Staff cost cuts,
  • Assistance from the government’s Jobs Support Scheme (JSS),
  • Renegotiating aircraft purchase commitments,
  • Tapping on the growth of the air cargo business.
  • Click 'view full report' button below to see details on each of the actions and also analysis on SIA's recovery trajectory in PDF report attached below.

Maintain HOLD on SIA

  • SIA enjoys a strong financial position given that it has access to S$15bn in equity funding and the company has already raised more than S$2bn in additional borrowings as at late-July 2020. On the other hand, given that international aviation requires perhaps up to 2024 before recovering to the 2019 baseline of passenger traffic, according to IATA, we think that there is no rush to invest in SIA until a COVID-19 vaccine becomes more widely available from 2HCY21 onwards, or if an effective COVID-19 drug is released. This explains our Hold rating on the stock.
  • We have tweaked upwards our target price based on a lower P/BV of 0.75x, from 0.84x previously (still pegged to -1 standard deviation from the mean since 2011). We think that a P/BV multiple of -2 standard deviations from the mean would be too onerous on SIA, as we have rolled forward our valuation basis to the adjusted end-FY23F BVPS of S$4.84 (from the end-FY22F BVPS) in order to capture as much of the expected losses arising from the COVID-19 pandemic as possible. Once a global aviation recovery becomes more certain, the market may be more comfortable with higher P/BV multiples.
  • To derive our BVPS forecasts, we have assumed that SIA will raise a further S$6.2bn in additional MCBs in FY22F, in addition to the S$3.5bn of MCBs issued on 8 June 2020. Click 'view full report' button below to see details on earnings revision and details on derivation of SIA's target price.
  • See also Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.

Raymond YAP CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-10-26
SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.63 UP 3.550