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


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 - Valuation & Recommendation

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