Singapore Airlines (SIA) - CGS-CIMB Research 2021-02-05: Another S$16bn Of Capital-Raising Headroom


Singapore Airlines (SIA) - Another S$16bn Of Capital-Raising Headroom

  • At its quarterly analyst briefing today, SIA said that it plans to reduce its cash burn by deploying more flights that can more than cover variable costs.
  • We reiterate our ADD call for SIA with a target price of S$4.89, based on P/BV of 0.94x (mean since 2011) against the end-FY22F adjusted BVPS.
  • Potential re-rating catalysts include fuel derivative MTM gains in 4QFY21F that may enable SIA to deliver another narrow quarterly loss.

SIA will attempt to move the daily cash burn lower

  • See 3QFY21 result highlights: Singapore Airlines (SIA) - CGS-CIMB Research 2021-02-05: Narrow 3Q Loss Should Please The Market. Since Apr, Singapore Airlines (SIA, SGX:C6L)’s quarterly non-fuel operating costs, including depreciation of ~S$500m, have fluctuated in a tight range of S$1.2bn to S$1.3bn, implying monthly cash burn of between S$233m and S$277m, or an average of S$250m.
  • SIA stated that its target is to reduce the cash burn to S$200m per month, and the key to achieving its goal was to generate more revenue by gradually reinstating its capacity.
  • From flying 19% of its available seat kilometre (ASK) capacity in Dec, SIA targets to fly 25% by end-Apr.
  • Our question to SIA was whether flying at the current passenger load factors (PLF) of 10-15% was profitable. SIA’s response was that it was not only covering the variable costs of its flights, but also making a positive contribution to covering fixed costs, even at mid-teens percentage load factors, because SIA has been able to remarket the belly space that was not used for the storage of passenger baggage as revenue-generating cargo space.
  • SIA also expects that its PLFs will increase as its global network covers a greater number of cities, as that increases the options for passengers to link different city-pairs via Changi.
  • SIA also said that it stands to benefit from COVID-19 vaccine cargoes from this quarter onwards, and that it is well-positioned to take its share of cargoes headed to Asia and the Southwest Pacific given its cold-chain handling capabilities at Changi.

Option to raise S$6.2bn from MCBs and S$10bn from aircraft

  • SIA has already raised S$13.3bn in equity and debt capital since the start of the pandemic, and is set to raise even more funding. Given the lengthy nature of the pandemic and the uncertainty of when global borders can be reopened, SIA appears to be partial towards issuing a further S$6.2bn of mandatory convertible bonds (MCB), on top of the S$3.5bn MCBs issued in Jun 2020; SIA will make its final decision in early-Apr as the MCBs cannot be issued later than 31 Jul.
  • In addition, SIA said that it has S$10bn of unencumbered aircraft assets, against which it has the option to raise new secured financing and/or sell and leaseback (SLB). After raising S$2bn in new financing collateralised against aircraft assets in 2020, SIA has the headroom to collateralise up to an additional S$2bn of its aircraft assets without breaching its negative pledge on its Medium Term Note (MTN) programme. As such, SIA is in advance negotiations to sell (and leaseback) its aircraft to lessors, of which the headroom is S$8bn. The MTN negative pledge does not restrict SIA from performing SLB transactions.
  • Our forecasts have incorporated the additional S$6.2bn MCB issue, which is treated as equity on the balance sheet; this is why we forecast SIA’s net gearing to be only 0.9% at end-FY22F.

SIA target price computation

  • Our target price of S$4.89 for SIA is based on an unchanged target P/BV multiple of 0.94x (mean since 2011), applied to the end-FY22F adjusted BVPS.
  • 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. See details in report attached below.
  • 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 Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.
  • Potential re-rating catalysts include stronger-than-expected recovery in passenger traffic following a quick containment of the global COVID-19 pandemic once vaccines are rolled out this year and higher-than-expected cost savings at the SIA group as a result of urgent efforts to contain costs. The SIA group disclosed that it expects to deploy 25% of its pre-COVID-19 passenger airline capacity by April 2021.
  • Downside risks include a longer-than-expected shutdown in global international travel as various countries keep their travel bans and restrictions on inbound order to prevent imported cases of COVID-19.

Raymond YAP CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-02-05
SGX Stock Analyst Report ADD MAINTAIN ADD 4.890 SAME 4.890