Singapore Airlines - CGS-CIMB Research 2020-11-09: SIA’s Worst Quarter May Be Behind It


Singapore Airlines - SIA’s Worst Quarter May Be Behind It

  • Singapore Airlines's 1HFY21 core net loss made up 71% of our forecast (61% of consensus); we consider this as broadly in line as 2HFY21F losses may be lower, in our view.
  • Reiterate HOLD on Singapore Airlines, with a lower target price of S$3.46 based on P/BV of 0.75x (- 1 s.d. from the mean) on the end-FY23F BVPS.
  • We think investors should stay on the sidelines until COVID-19 vaccines are widely available, possibly from mid-CY21 onwards.

SIA's 2QFY21 core net loss lower q-o-q due to lower MTM losses...

  • Singapore Airlines (SIA, SGX:C6L)'s 2QFY21’s reported net loss of S$2.3bn was SIA’s largest ever, coming right after SIA reported a staggering net loss of S$1.1bn in the immediately preceding 1QFY21.
  • The reported 1Q net loss included S$127m in aircraft impairments and provision for closure costs of NokScoot but the reported 2Q net loss included substantially more exceptional items, including S$1.33bn in aircraft impairments, S$170m in goodwill write-off, S$42m in headcount rationalisation costs, S$35m impairment of SIA Engineering (SGX:S59)’s base maintenance assets, etc. After stripping these out, SIA’s core net loss amounted to S$719m in the 2Q, which narrowed from 1Q’s S$1bn loss; the q-o-q improvement was mainly due to a lower value of MTM losses on ineffective fuel hedges transferred from the balance sheet to the P&L.
  • In the 1Q, SIA transferred S$464m of fuel derivative losses into the P&L in relation to derivatives that were expected to be in excess of SIA group’s actual fuel requirements in FY22F; in the 2Q, only S$100m in fuel derivative losses were similarly debited into the P&L. This helped sequentially reduce SIA's core EBIT losses at the three passenger airlines.

… with the core operations remaining in the doldrums

  • All three passenger airlines managed to reduce their quarterly core EBIT losses in the 2Q from the 1Q. SIA mainline carrier (including the cargo operations) saw its 2Q core EBIT loss narrow to S$593m from 1Q’s S$667m. SilkAir’s core EBIT loss reduced to S$63m in the 2Q from 1Q’s S$102m while Scott’s 2Q core EBIT loss narrowed to S$142m from 1Q’s S$259m.
  • As airline revenues did not change materially q-o-q and the airlines’ capacity remained severely curtailed, the improved EBIT performance came largely from the reduced MTM losses as explained above.
  • On the other hand, SIA Engineering’s core EBIT loss widened q-o-q from S$9m in the 1Q to S$16m in the 2Q due to a reduction in the volume of maintenance work as airlines globally grounded most of their fleet. See report: SIA Engineering - CGS-CIMB Research 2020-11-04: Pending Changi Airport Traffic.

The next six months (2HFY21F) should be sequentially better

Raymond YAP CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-11-09
SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.46 DOWN 3.630