Singapore Airlines - UOB Kay Hian 2021-02-08: 3QFY21 Q-o-q Improvement Supports Gradual Capacity Addition


Singapore Airlines - 3QFY21 Q-o-q Improvement Supports Gradual Capacity Addition

  • While SIA’s 9MFY21 results were below the street’s estimates, it was above ours, and we are encouraged by the q-o-q improvement at operating and bottom-line, brought about by increased aircraft utilisation and firm yields.
  • We believe that SIA’s careful strategy of adding capacity should lead to lower losses, provided cargo demand and yields remain firm.
  • We now value SIA at 0.9x two years’ average forward book value and derive a target price of S$4.00.
  • Suggested entry level: S$3.80. Upgrade SIA to HOLD.

SIA's 3QFY21 operating and net profit better than expected.

  • Singapore Airlines (SIA, SGX:C6L)'s 9MFY21 earnings amounted to 100% of the street’s full-year estimate but amounted to 85% of our estimated ful-year loss.
  • On a q-o-q basis, SIA registered a 32% increase in revenue due to higher aircraft utilisation and better yields, which led to a significant reduction in operating losses.
  • Core net loss is estimated at S$205m, which was significantly lower than 2QFY21’s estimated loss. However, a key variance was that SIA recognised S$350m in tax credit for the quarter and this was significantly higher than the S$295m recognised for the whole of 1HFY21.
  • Still, we estimate that SIA was about S$220m EBITDA positive for the quarter. Book value rose S$0.14 to S$5.28, presumably due to fair value gains recognised in reserves.

SIA plans to add capacity to 25% of pre-COVID-19 levels for 4QFY21

  • SIA reiterated plans to add capacity to 25% of pre-COVID-19 levels for 4QFY21 compared with 20% as at 3QFY21. While there are concerns about the potential of higher losses if load factors remain low, SIA indicated that the incremental bellyhold cargo could cover variable costs.
  • We also believe that both pax and cargo yields are likely to remain elevated and this could aid operating cash flow to breakeven levels.

SIA raised an additional S$1.4b in 3QFY21; not ruling out raising another S$6.2b in mandatory convertible bonds (MCB) by Jul 21.

  • SIA indicated that it will however make its decision by Apr 21. As at end-Dec 20, SIA has S$12.7b in liquid funds, S$1.4b higher q-o-q, but this was due to the issuance of S$850m in convertible bonds and another S$500m in 10- year notes.
  • SIA also has another S$9.5b in Medium-Term Notes.

Operating cash burn likely to gradually decline over the next two quarters.

  • We reckon that SIA was EBITDA positive for the quarter and also believe that working capital changes might have been in SIA’s favour for the period as customers were extending the bookings. This would then suggest minimal outflow from ticket redemptions.
  • Factoring in interest and lease payments, SIA however guided that it is still losing about S$250m per month and hopes to reduce cash burn to S$200m. A key uncertainty is whether SIA will exercise the remainder of S$6.2b in MCB. Given the existing credit lines, we assume that SIA would not need to do so, but this would really be dependent on ongoing discussions to defer aircraft deliveries.

Lower SIA's FY21 net loss forecast by S$130m

  • We lower our SIA's FY21 net loss forecast by S$130m after factoring in higher tax credits. We have however lowered our pax load factor assumptions for FY22 and now estimate losses for the year vs a profit of S$261m previously.
  • For FY22, we estimate that pax traffic will amount to 24% of pre-COVID-19 levels.

Upgrade SIA to HOLD with a target price of S$4.00.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-02-08
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