Singapore Airlines - UOB Kay Hian 2020-12-04: SIA Is More Expensive Now Than It Was 2 Years Ago. Downgrade to SELL.

SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Airlines - SIA Is More Expensive Now Than It Was 2 Years Ago

While the recent debt issuance would stave off operational risks, shareholder returns are likely to be severely crimped from higher interest payments as well as low ROIC. This is especially if much of Singapore Airlines’s S$10b MTN goes towards funding capex.
We have also compared Singapore Airlines’s enterprise value to pre-COVID-19 FY20 EBITDA, which at 10.5x, is more than 2SD to the 5-year mean. We have made similar comparisons on a trailing book value and have reached the same conclusion.
Singapore Airlines is overvalued.
Downgrade Singapore Airlines to SELL. Target price: S$3.80.

We believe that the euphoria of SIA share price following the announcement of vaccines is unjustified and opine that Singapore Airlines (SGX:C6L) is overvalued, even after the recent pullback.
For a start, we had already imputed a recovery in traffic for FY22 and had pegged fair value at 0.9x to FY22’s book value. While there is a great deal of uncertainty on the pace of traffic and load factor recovery, we believe pre-COVID-19 level FY20 EBITDA offers a fair hurdle in terms of earnings prospects for FY21. With that, we have valued Singapore Airlines on a pre-COVID-19 and post- COVID-19 EV/EBITDA multiple. The enterprise value factors in:
1. S$8.8b in rights and mandatory convertible bonds (MCB) issue;
2. new convertible debt of S$850m and exercise of S$500m from a S$10b medium-term note (MTN).

Given Singapore Airlines’s massive fund raising, we believe EV/EBITDA multiple would provide a more incisive perspective on Singapore Airlines and have factored in S$3.5b in MCB along with capitalised coupons. Based on that, Singapore Airlines would be trading at a lofty 10.5x EV/EBITDA on historical EBITDA, which on a historical basis is more than 2SD to the 5-year mean, which is clearly is unjustifiable given the carrier’s massive recapitalisation.
Even forward EV/EBITDA multiple at 11.0x is lofty and our net profit numbers are already higher than street estimates.

In assessing this, we used trailing FY20’s shareholder equity and added rights and MCB of S$8.8b and also adjusted for the theoretical conversion of MCB into shares. Based on that, Singapore Airlines’s trailing book value per share would be S$4.80.
However, if we factor in the asset impairment that Singapore Airlines announced in 1HFY20, book value per share would drop to S$4.43, bearing in mind that Singapore Airlines used to trade at P/B multiples of 0.8-0.9x even prior to COVID-19; a case can clearly be made that Singapore Airlines is overvalued even on a P/B basis.

We believe that investors have not factored in the impact to Singapore Airlines’s earnings from additional funding.
While recent debt issuance would stave off operational risks, in the event of prolonged border closures, shareholders are likely to be severely crimped from higher interest payments as well as low return on invested capital, especially if much of Singapore Airlines’s S$10b MTN goes towards funding capex.
We had upgraded Singapore Airlines earlier to BUY on expectations of an imminent vaccine announcement and gradual border opening. See Singapore Airlines (SIA) - UOB Kay Hian 2020-10-22: At An Important Inflection Point; Upgrade To BUY. That opportunity has passed and we now envisage downside risk to the stock.
See SIA Share Price; SIA Target Price; SIA Analyst Reports; SIA Dividend History; SIA Announcements; SIA Latest News.
We have lowered our Singapore Airlines's FY22 loss estimate by S$230m, after assuming higher load factors in 2HFY22.
Downgrade Singapore Airlines to SELL from BUY. We continue to value Singapore Airlines at 0.9x FY22F’s book value and derived a target price of S$3.80.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-12-04

SGX Stock Analyst Report SELL DOWNGRADE BUY 3.80 DOWN 3.750