SINGAPORE AIRLINES LTD (SGX:C6L)
Singapore Airlines (SIA) - Near-Term Positives For The Next 6 Months
- SIA’s capacity recovery trajectory remains a huge source of uncertainty, and we note that SIA’s assumed trajectory is slower than ours.
- Still, the near-term positives include the SIN-HKG travel bubble, the air freight peak season, the reduced cash burn rate, and upcoming capital raising.
- Reiterate HOLD on SIA with an unchanged target price.
SIA's capacity recovery may be slower than our expectations…
- Singapore Airlines (SIA, SGX:C6L) hosted an analyst-cum-media briefing in relation to the release of its 1HFY21 results last Friday. See SIA's announcements and our result note: Singapore Airlines - CGS-CIMB Research 2020-11-09: SIA’s Worst Quarter May Be Behind It.
- The most interesting disclosure was that the SIA group expects to deploy 16% of its pre-COVID-19 passenger airline capacity by Dec 2020, rising to only 50% by Dec 2021. This averages 33% of its pre-COVID-19 capacity during CY21, in contrast to our current estimate of 45% during FY22F (Apr 2021 to Mar 2022).
- Even if we assume a strong pickup in passenger airline capacity deployments for Jan-Mar 2022, it is highly unlikely for SIA group’s capacity to hit our 45% assumption for FY22F. Given the uncertainties brought about by the global pandemic, it is not possible to say if SIA is too conservative, or if we are too bullish. However, there are important implications.
…with positive and negative implications
- First, SIA’s conservatism means that it is less likely to transfer accumulated unrealised mark-to-market (MTM) fuel derivative losses from the balance sheet to the P&L, on account of the derivatives being in excess of SIA’s actual fuel requirements, and hence no longer qualifying as effective fuel hedges. This is a positive for the future earnings announcements.
- On the other hand, if SIA is correct in its capacity recovery assumptions, our earnings estimates for FY22F (and possibly beyond) may have to be revised lower, which is a negative outcome. For now, we have kept our assumptions unchanged as the situation is still developing and a COVID-19 vaccine, once available, may be able to change the realities for the aviation industry slowly, but surely.
Some positives to look forward to in the next six months
- The Singapore-Hong Kong travel bubble is expected to start sometime this month, and we expect the demand to be reasonably good, albeit likely still lower than pre-COVID-19, as travellers will need to pay for COVID-19 tests (making short trips expensive) and because the travel bubble will largely cater for origin-and-destination travel, with transfer traffic likely to stay modest.
- SIA will also enjoy the normal year-end cargo boom, and it will be better-placed to capitalise on it, as from this week, it will deploy two 777-300ERs (without seats) on cargo-only flights (1-year payback to recover the retrofit cost).
- SIA group’s cash burn has reduced from S$350m/month in 1QFY21 to S$300m/month in 2QFY21, with its end-Sep cash pile of S$7bn able to last 24 months. The cash burn will likely fall further in 2HFY21F as revenues pick up.
- Finally, SIA is in advanced stages of raising more cash via aircraft sale and leasebacks and additional secured debt funding. SIA also has access to S$6.2bn in Mandatory Convertible Bonds which it must issue by 31 Jul 2021 if it so chooses (SIA to decide by Mar 2021).
SIA's target price computation
- Our target price of S$3.46 for SIA is based on an unchanged P/BV of 0.75x (pegged to - 1 standard deviation from the mean since 2011). SIA's share price is currently trading at -2 s.d. from the mean but we think that this is too onerous for SIA as we have rolled forward our valuation basis to the adjusted end-FY23F BVPS of S$4.62 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 mandatory convertible bonds (MCBs) in FY22F, in addition to the S$3.5bn of MCBs issued on 8 June 2020. As at 30 September 2020, SIA had a BVPS of S$5.14.
- Our adjusted BVPS calculation treats half of the MCB as debt (although the accounting treatment sees it as wholly equity) because we have assumed that SIA will endeavour to redeem half of the MCBs before their 10-year maturity or will refinance them using other sources of debt.
- See PDF report attached below for more details.
- 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.
- Previous reports:
Raymond YAP CFA
CGS-CIMB Research
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https://www.cgs-cimb.com
2020-11-10
SGX Stock
Analyst Report
3.460
SAME
3.460
