Singapore Airlines (SIA) - DBS Research 2020-11-13: Long But Visible Recovery Path

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SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Airlines (SIA) - Long But Visible Recovery Path

• Interim loss of S$3.5bn as revenue plunged 80% y-o-y, including impairment charges of S$1.65bn.
• Positive news on vaccine development brings forward the recovery trajectory for international air travel but the road remains long.
• Factoring in the impairment charges and pushing back SIA’s recovery path as a second wave hits both the US and Europe, we’ve lowered our SIA's FY21F and FY22F forecasts to losses of S$4.5bn and S$36m.

SIA reported S$3.5bn loss in 1H21, losses to narrow while balance sheet is strong

• Singapore Airlines (SIA, SGX:C6L) reported a first half (for the 6-month ending September) loss of S$3.5bn that was below market expectations as the group booked various impairment charges totalling c.S$1.65bn and recorded more fuel hedging ineffectiveness of S$564m. See Singapore Airlines Announcements.
• Revenue declined 80% y-o-y to S$1.6bn on lower passenger flown revenue, though this was above our expectations as cargo flown revenue jumped 28% y-o-y to S$274m.
• Overall passenger carriage plunged 98% y-o-y, slightly offset by a 99% improvement in passenger yield. Cargo carriage fell 41% y-o-y but cargo yield improved 105%. An operating loss of S$1,863m was recorded versus a profit of S$413m a year ago which included S$563m in fuel hedging ineffectiveness as expectations on the rate of capacity recovery was adjusted downwards. Fuel hedging activity has been paused since March 2020.
• There were several non-cash impairment charges taken during the period, mainly
  1. S$1,333m on the carrying values of older generation aircraft with 26 of these deemed surplus to fleet requirements (seven A380s, eight B777s, nine A320s and two A319s),
  2. S$127m charge from the liquidation of NokScoot, and
  3. S$170m goodwill from the acquisition of Tiger Airways in 2014.
• As a result, SIA recorded a net loss of S$3,567m for 1HFY21 versus a profit of S$206m in 1HFY20.

Strong liquidity to ride through the crisis.

• We expect SIA to record further losses in the second half though with significantly lower impairment charges and likely less fuel hedging ineffectiveness. With over S$7bn in cash and bank balances, and an estimated cash burn rate of c.S$300m per month (excluding capex), the carrier is in a strong liquidity position to ride through the current crisis.

SIA also announced the issuance of S$850m in convertible bonds

• SIA also announced the issuance of S$850m in convertible bonds, which will further help to boost its liquidity position. These convertible bonds bear at interest rate of 1.625% with an initial conversion price of S$5.743 for each new share, representing over 45% premium over the last traded price on 12 November. They have a maturity date of 5 years from 3 December 2020 and will be redeemed at 100% of their principal amount unless previously redeemed, converted, or purchased and cancelled

Positives news on vaccine development improves recovery trajectory visibility but the road is still long

• Pfizer vaccine candidate’s interim results bring cheer to airlines. The aviation sector was uplifted in recent days by the announcement of the first interim results in large-scale trials showing the Pfizer/BioNTech candidate to be 90% effective, according to the manufacturers. The companies said they have so far found no serious safety concerns and expect to seek US authorisation this month for emergency use of the vaccine.
• The company says gathering required safety data will take until the third week of November, after which it will submit a dossier to regulators for approval. Speedy licensing could mean the first doses being given to healthcare workers by the end of the year.
• This news is significant in a few ways:
  1. the potential 90% effectiveness of the two-dose vaccine (taken two weeks apart, and taking effect after a week) means that the virus might be brought under control sooner than some of the more pessimistic forecasts that stretch out to as far as 2025, and
  2. other vaccine candidates could also find success soon and help produce more doses (Pfizer estimates that it could produce 50m doses or inoculate 25m people by end-2020, and up to 1.3bn doses (or 650m people) by end-2021.
• While this news does provide a clearer recovery path for international travel to resume sooner rather than later, we caution that there are still many challenges for any vaccine to be deployed globally, including
  1. manufacturing capacity,
  2. logistics,
  3. willingness of the population that will accept vaccination and
  4. healthcare infrastructure.
• It is likely that developed markets will have access to any vaccine before emerging markets as well. Given the second wave of COVID-19 we are seeing in the US and Europe, it will still take time for the pandemic to be brought under control, even with a vaccine. In fact, we believe that the recovery trajectory is bound to be the slowest among all travel segments given that many governments are likely to remain highly cautious in reopening their borders to foreign visitors.
• We think the inflection point for SIA will be when major markets such as China, Japan or Australia open up their borders for unrestricted travel, or when the US or EU has controlled the pandemic well enough for other countries to open up their borders to them. Hence, the travel bubble arrangement between Singapore and Hong Kong will be closely watched for its level of success.
• A surge in oil price, especially if it is ahead of travel demand recovery, is also something to watch out for as it would crimp any margin recovery for airlines as and when demand rebounds. In the near term, however, a rebound in oil price is positive for carriers that have a large (ineffective) fuel hedging position such as SIA.

Lowering forecasts for SIA to reflect a slower recovery trajectory than previously assumed.

• We have assumed that SIA’s overall passenger traffic will gradually recover over the next 15-18 months to 80% of pre-COVID-19 levels by March 2022, or 67% of pre-COVID-19 levels by end-2021, as international borders start to open up and as COVID-19 comes under control steadily globally with the help of effective vaccines.
• We had previously assumed that traffic would nearly normalize by end 2021 but this has since been derailed by a resurgence of COVID-19 in Europe and the US, where daily new cases are reaching record highs.
• In contrast, we believe that SIA has assumed that capacity will be restored to 50% of pre-COVID-19 levels by end- 2021 for fuel hedging ineffectiveness calculations.

Projected losses of S$4.5bn for SIA in FY21F and S$36m in FY22F

• We projected losses of S$4.5bn for SIA in FY21F and S$36m for FY22F, versus a previous forecast of a loss of S$2.2bn in FY21F and a profit of S$470m in FY22F.
• Based on our new assumptions, we now project SIA to record annual revenues of S$4.2bn for FY21F and S$12bn for FY22F, an operating loss of S$2.1bn for FY21F, and an operating profit of S$222m for FY22F.
• See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.
• In addition to the recovery trajectory for passenger carriage, we have also assumed that jet fuel will average c. US$50 per barrel in FY21F and US$65 per barrel in FY22F. Given this recovery trajectory and fuel price assumptions, SIA could break even by the last quarter of 2021.

Paul YONG CFA DBS Group Research | https://www.dbsvickers.com/ 2020-11-13

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