Singapore Airlines (SIA) - CGS-CIMB Research 2021-02-05: Narrow 3Q Loss Should Please The Market


Singapore Airlines (SIA) - Narrow 3Q Loss Should Please The Market

  • SIA's 9MFY21 core net loss of S$1.9bn was broadly in-line with our full-year loss forecast of S$2bn, but substantially better than consensus’ S$3.8bn loss.
  • Potential rerating catalysts include fuel derivative MTM gains in 4QFY21F that may enable SIA to deliver a very narrow quarterly loss.

Low 3QFY21 loss driven by seasonal cargo lift and MTM gains

  • Singapore Airlines (SGX:C6L, SIA)’s S$160m core net loss in 3QFY21 (Oct 2020 to Dec 2020) compares favourably to the 1Q’s S$1bn loss and 2Q’s S$726m loss. The S$566m q-o-q narrowing of core net losses was mainly driven by
    1. fuel derivative MTM (mark-to-market) gains in the 3Q of S$187m vs MTM losses in the 2Q of S$102m (S$289m q-o-q positive swing) due to an increase in spot Brent crude prices from US$41/bbl at end-Sep to US$51/bbl at end-Dec, and
    2. ~S$156m q-o-q increase in the cargo division’s EBIT as a result of the usual year-end cargo peak season.
  • See SIA's announcements.
  • The rest of the q-o-q improvement may have been due to various cost savings of which we are unable to analyse as SIA only releases detailed financials for its interim and final results.

4QFY21F may also see low quarterly losses

  • SIA may deliver another quarter of low core net losses in this current quarter, as the Brent crude oil price has rallied to US$58/bbl at the time of writing, due to the global destocking of oil inventories with Saudi Arabia voluntarily reducing its oil production by 1m barrels/day in Feb and Mar.
  • SIA is also pushing up its group ASK capacity as a percentage of the pre-pandemic ASK, from 14% at end-Dec to 25% by end-Apr; on the not-unreasonable basis that SIA can cover its variable costs or slightly more than that, operating losses in 4QFY21F may be reduced.
  • SIA has also embarked on its new 3-year transformation programme which may help it achieve a more competitive cost structure.
  • On the other hand, the cargo business is past its seasonal year-end peak, although it may find some support from the airfreight of vaccines.
  • SIA noted that it is currently in advance negotiations for the sale and leaseback of various aircraft, which could raise even more cash for the airline group.

The road to full recovery remains long and uneven

  • With aircraft impairments already behind SIA, and global vaccine rollouts already in progress, the worst is already behind the airline industry, although for a pure international airline that is heavily reliant on transit traffic and on business travel, SIA’s recovery may lag other airlines that have domestic networks, a larger proportion of leisure and/or origin-and-destination traffic.
  • See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.
  • For SIA as a whole, we are forecasting that it achieves only 33% of its pre-pandemic ASK capacity in FY22F, up from 11% in FY21F, and surpassing its pre-pandemic level only in four years’ time.
  • Refer to the report attached below for details on our SIA target price computation and forecast changes. Reiterate ADD for SIA with a slightly reduced target price still based on P/BV of 0.94x (mean since 2011) against the end-FY22F adjusted BVPS.
  • The ongoing spread of more virulent strains of the COVID-19 virus suggests a need for investors to remain patient, as the reopening of global borders may happen more meaningfully only in 3Q or 4QCY21. With S$13.3bn in equity and debt capital already raised (see summary of SIA's equity and debt capital raising exercises since the start of COVID-19 in report below), upcoming aircraft sale and leasebacks, and the S$6.2bn of convertible bonds, SIA is in a very strong financial position.

Raymond YAP CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-02-05
SGX Stock Analyst Report ADD MAINTAIN ADD 4.89 DOWN 4.910