Singapore Airlines (SIA) - UOB Kay Hian 2020-10-22: At An Important Inflection Point; Upgrade To BUY

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SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Airlines (SIA) - At An Important Inflection Point; Upgrade To BUY

• Singapore’s formation of travel bubbles is likely to gain momentum in the next three months. Together with the government’s proposal to provide COVID-19 travel insurance, this reduces the risk profile of travellers. We are now more positive on cargo operations rather than the recovery in pax traffic, especially from higher freight rates when the vaccine dissemination gets underway.
• We now value Singapore Airlines (SGX:C6L) at the same P/B multiple as Cathay Pacific Airlines. Upgrade Singapore Airlines to BUY.

Singapore government to provide COVID-19 travel insurance.

• In what must be the first move by any country, the Singapore government announced yesterday that it will provide subsidies and insurance coverage for Singaporeans, permanent residents and long-term pass holders who develop COVID-19 symptoms within 14 days of their return. We believe this move will boost confidence in air travel, leading to more advance bookings and improving Singapore Airlines (SIA)’s cash flow.

Singapore could roll out rapid COVID-19 testing as prelude to forming more travel bubbles.

• On the same day that Singapore announced the COVID-19 travel insurance, the Singapore media reported that a National University of Singapore start-up had developed a 1-minute COVID-19 breath analyser which has a greater than 90% efficacy. Singapore’s Nanyang Technological University is also developing a rapid COVID-19 test which could deliver results in 37 minutes.
• At present, pre-departure COVID-19 test costs about S$200 in Singapore and about US$45 in Hong Kong. If such pre-departure test costs are lower, we believe this will further incentivise travel.
• All in all, we are encouraged by the Singapore government’s efforts to open up Singapore’s borders to countries with low COVID-19 infections.

More travel bubbles likely, following announcement of travel corridor with Hong Kong.

• We believe the Singapore government will negotiate with Australia, China, Japan, Taiwan and Thailand to open similar travel corridors with mandatory COVID-19 testing.

Ramp-up of cargo operations likely to reduce core losses in 2HFY21.

• Presently, cargo operations account for almost 80% of group capacity while load factors achieved a record high of 89% in Sep 20, implying a shortage of cargo capacity. Even if more countries open their borders, we believe Singapore Airlines will continue to add more cargo capacity by:
  1. converting some of Scoot’s A320 aircraft to carry cargo; and
  2. utilising Singapore Airlines’ older B777-300 to carry dedicated cargo.
• We also believe cargo operations would be much more lucrative than passenger operations. Scoot’s reconfigured A320 can carry almost 20 tonnes of cargo and current cargo rates are at S$5-6/kg, more than double of that in the previous year. Some industry experts believe cargo rates could go up to US$10/kg once vaccines are moved via air.

SIA burned another S$1.8b over two months.

• Singapore Airlines has already utilised S$6.2b of its S$8.8b rights proceeds, but highlighted it had S$1.9b in lines of credit and the option to raise another S$6.2b.
• We had previously highlighted that Singapore Airlines would very likely exercise the rights to the additional convertible bonds (which will be funded by Temasek) by end-Mar 21 and have factored that in our assumptions. See previous report: Singapore Airlines - UOB Kay Hian 2020-08-03: 1QFY20 Loss Within Expectation But SIA Expects A Slower Traffic Recovery. The carrier had also said that it plans to cut 4,300 positions across the group, which we estimate could lead to S$0.3b in cost savings.

Singapore Airlines - Valuation & Recommendation

• Notwithstanding a likely second record mandatory convertible bond (MCB) issuance, we are now more positive on Singapore Airlines. We identify three stock price catalysts:
  1. China and Singapore opening their borders;
  2. Singapore Airlines announcing that it is planning to convert or use more of its passenger aircraft to carry cargo; and
  3. announcement of a global distribution of vaccine.
• The last factor is likely to lead to a surge in freight rates in which Singapore Airlines could benefit due to Singapore’s status as a transhipment hub. Similarly, we believe that as demand for travel rises, ticket prices are likely to rise sharply. While it is impossible to accurately estimate the impact, we believe the upside risk is greater.
• Upgrade Singapore Airlines to BUY with higher target price of S$3.94. This is a non-consensus call, but nonetheless we believe it is an opportune time to add positions.
• There are minimal changes to our earnings assumptions but there is upside risk to our cargo yield assumptions for FY21 and FY22. We have also not factored in any one-off restructuring related costs.
• See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.
• We now value Singapore Airlines at 0.9x (previously 0.8x) FY21F book value, according the company the same P/B valuation as Cathay Pacific Airlines. We have also factored in additional dilution arising from the issuance of new MCB.
• See also recent reports on aviation:
  • Aviation - UOB Kay Hian 2020-09-11: SATS & ST Engineering Will Be Key Beneficiaries Of COVID-19 Vaccine Distribution.
  • Singapore Aviation Sector - UOB Kay Hian 2020-10-08: Focus On ST Engineering For Dividend Yield; Raise Target Price For SATS To S$3.40.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-10-22

SGX Stock Analyst Report BUY UPGRADE HOLD 3.94 UP 3.530