Singapore Airlines 1HFY21 - UOB Kay Hian 2020-11-10: The Long Wait For A Vaccine

SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Airlines 1HFY21 - The Long Wait For A Vaccine

While headline losses were shocking, 80% of the losses were non-cash charges and SIA had operating cash burn of only S$255m in 1HFY21.
SIA’s guidance of higher capacity addition is also a sign of confidence. As the vaccine development gains momentum, we believe the liquidity environment for airlines will improve with higher forward bookings and easier access to credit.
We are also optimistic of a recovery in cargo traffic and yields brought about by the delivery of COVID-19 vaccines.

Singapore Airlines (SIA) recognised S$1.3b in impairment on 26 aircraft in 2QFY21 after deeming these aircraft as surplus. The impairment was 30% higher than initial guidance of S$1b. SIA also made the following impairment charges:
1. S$170m in goodwill on Tiger Airways;
2. S$35m in base maintenance charges for SIA Engineering (SGX:S59); and
3. S$42m in headcount rationalisation cost.
Factoring ineffective fuel hedges, we estimate SIA recognised S$2.8b in non-cash charges for the period. Including S$3.5b in mandatory convertible bonds (MCB) which were recognised as equity, book value was S$5.14/share; excluding which, book value would be S$3.97/share. See SIA Announcements.
Net debt-to-equity inclusive of MCB was 16% (excluding MCB: 20.7%).

Much of the cash burn was due to working capital changes of S$1.2b in ticket refunds and S$1.8b in payments to trade creditors, presumably the bulk was for payment for fuel hedges. Factoring in lease payments, operating cash burn would have been S$255m. SIA also spent S$893m on capex and S$114.6m on investment in associates.
SIA is in negotiations with Boeing to defer capex and an agreement has been reached with Airbus but gave no details.
SIA had previously guided for S$5.3b and S$5.7b in capex for FY21-22 respectively. We now assume that capex for FY21-22 would be halved from prior guidance.

The latter included S$2.3b in payments due to trade creditors and S$1.43b in debt due. To supplement its S$7b of cash and S$2.2b in credit lines, SIA is looking to sell and lease back 12 aircraft, which could ease its immediate funding woes.
SIA also highlighted that some of the S$800m in current forward bookings sales might not be redeemed over the next 12 months. We sense that SIA is looking to avoid the issuance of another S$6.2b in MCB. However, this would be largely dependent on the expanded border reopening and confidence in travel.

As at 1HFY21, pax flown revenue fell by S$6.7b for the group while cargo revenue rose 24% y-o-y to S$1.24b. While SIA is optimistic of continued strength in cargo traffic in the coming quarters, the carrier needs to grow its pax traffic to boost revenue. Naturally, this is contingent on border reopenings and the willingness to travel.
To that extent, SIA guided for group passenger capacity to rise from pre-COVID-19 levels of 10% as at Oct 20 to 16% by Dec 20 and noted pent-up demand for travel. However, the carrier indicated it will only add capacity if it can cover variable costs, which we would estimate would imply pax load factor of at least 40%.

SIA is doing all the right things to reduce cash burn and is also bolstering its liquidity. While the operating environment is highly uncertain, we believe the risks at this stage are equally weighted to the upside and downside, but any newsflow of an effective vaccine by this year-end would aid confidence in the stock. This would lead to advance bookings and boost SIA’s chances to raise funds.

We believe the SIA brand still commands tremendous brand loyalty, which could lead to strong pricing power when demand eventually returns. As such, we maintain BUY but with the caveat that effective vaccines are manufactured by this year-end.
We have also assumed SIA would issue S$6.2b in MCB by Mar 21.
We raise our net loss estimate for FY21 by S$1.0b to S$4.0b, factoring in larger-than-expected impairment charges and higher opex. Maintain BUY with lower target price of S$3.75 (previously S$3.94).
We value SIA at 0.9x FY2022F book value of as S$4.17.
See SIA Share Price; SIA Target Price; SIA Analyst Reports; SIA Dividend History; SIA Announcements; SIA Latest News.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-11-10

SGX Stock Analyst Report BUY MAINTAIN BUY 3.75 DOWN 3.940