Singapore Airlines - CGS-CIMB Research 2020-11-16: Upgrading SIA To ADD On Improving Risk-Reward


Singapore Airlines - Upgrading SIA To ADD On Improving Risk-Reward

  • We upgrade SIA from Hold to ADD as downside surprises are limited with aircraft assets already impaired and equity capital raising already complete.
  • ‘Risk-on’ investing may see capital flowing into safe airline names like SIA on positive vaccine and travel bubble newsflow as well as capacity restoration.
  • SIA's targe price raised to S$4.57 (P/BV mean of 0.94x on FY22F BVPS).

SIA reinforces its balance sheet armour…

  • We upgrade our recommendation on Singapore Airlines (SIA, SGX:C6L) from Hold to ADD to incorporate a better risk-reward balance from three perspectives:
    1. SIA’s balance sheet strength,
    2. the Singapore government’s efforts to gradually open its borders, and
    3. the potential introduction of COVID-19 vaccines sometime during 2021.
  • From the balance sheet perspective, on 8 Jun, SIA completed its S$5.3bn rights issue and issued its S$3.5bn mandatory convertible bonds (MCB) with a conversion price of S$4.84. SIA also renewed S$1.7bn existing lines of credit and secured new S$0.5bn committed lines of credit.
  • SIA had earlier received secured financing of S$2bn on its A350/787 aircraft, and at least S$1bn of additional secured financing is to come, either via new secured debt or via sale-and-leaseback transactions. In Dec, SIA will issue S$850m in 5-year convertible bonds (CB; 1.625% coupon, conversion price of S$5.743), which is much cheaper than the 10-year MCBs that carry a yield of 4% if SIA redeems them within 4 years, 5% if redemption is between 5 and 7 years and 6% if redemption is between 8 and 10 years.
  • We expect SIA to have a gross cash balance of c.S$8bn by end-Dec vs. S$7bn as at end-Sep, solidifying SIA’s balance sheet strength and reducing its risk profile.

… while external developments are becoming more promising

  • Singapore has been very proactive in efforts to reopen its borders to countries deemed as low risk of importing COVID-19 infections into Singapore, as we detailed on pages 12-15 of our 9 Nov report Singapore Airlines - CGS-CIMB Research 2020-11-09: SIA’s Worst Quarter May Be Behind It. For instance, the Hong Kong-Singapore travel bubble will commence on 22 Nov. This may help SIA rebuild its network and capture the traffic recovery faster than other ASEAN airlines.
  • Finally, the potential introduction of COVID-19 vaccines from early-2021 onwards, including in Singapore itself, will likely cause investors to allocate capital into the cyclical beneficiaries, such as airline stocks, with SIA being one of the safest airline stocks to be positioned in, we believe.

Valuation based on P/BV of 0.94x (historical mean) on FY22F BVPS

  • See SIA Share Price; SIA Target Price; SIA Analyst Reports; SIA Dividend History; SIA Announcements; SIA Latest News.
  • Our previous Target Price of S$3.46 was based on P/BV of 0.75x (pegged to -1 s.d. from the mean since 2011) on the FY23F BVPS. Based on the positives highlighted above, we suspect that we may have been too conservative.
  • We now raise the P/BV multiple to 0.94x (mean since 2011) and now apply it against the FY22F BVPS to derive our new Target Price of S$4.57. We are now using the mean P/BV as we have already incorporated the expected losses into the BVPS number. Hence, we may be double-penalising SIA if we continue to apply the -1 s.d. P/BV.
  • Also, we are now using the FY22F BVPS as the FY23F BVPS is too distant to be able to forecast accurately and less immediate to investors today. See PDF report attached below for complete analysis on SIA and the details on SIA's earnings forecast revisions.

Raymond YAP CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-11-16
SGX Stock Analyst Report ADD UPGRADE HOLD 4.57 UP 3.460