Singapore Airlines (SIA) - CGS-CIMB Research 2021-03-18: Time To Take Profit?


Singapore Airlines (SIA) - Time To Take Profit?

  • We downgrade Singapore Airlines (SGX:C6L) from Add to HOLD as the SIA's share price is merely 11% shy of its high of S$6.42 on 2 Jan 2020, just prior to the outbreak of COVID-19.
  • Our target price for SIA for is raised to S$6 as we raise our FY22F adjusted BVPS estimate by 9% on fuel derivative gains, and raise our P/BV multiple from 0.94x to 1.06x. 
  • The latter historical P/BV multiple is +1 s.d. above the mean since 2011, vs the mean previously, to reflect investors’ willingness to pay for recovery plays.

Rising optimism being priced into SIA’s shares

  • SIA's share price has rallied sharply in recent weeks due to optimism that the ongoing global COVID-19 vaccine rollouts will reopen international borders and restore global travel; the market appears to have ignored the slower-than-expected pace of vaccinations in the Europe Union and blood-clotting issues with the AstraZeneca vaccine.
  • SIA's share price also reacted positive to news on 14 Mar that Singapore and Australia are working to open an all-purpose travel bubble by Jul 2021, which may allow vaccinated individuals to travel without quarantine restrictions.
  • The other positive is the fact that Brent crude oil prices have rallied, particularly since OPEC+ decided on 4 Mar to substantially roll-over the Mar production cuts into Apr, and Saudi Arabia said that it will continue its voluntary 1 million barrel per day production cut for another month into Apr. While higher oil prices are usually negative for Singapore Airlines (SIA, SGX:C6L) under normal operating conditions, SIA had over-hedged its jet fuel requirements for FY21F and FY22F, hence SIA will book realised mark-to-market (MTM) profits in its 4QFY21F P&L from its fuel derivatives that mature in 4QFY21F, as the derivative strike prices of ~US$60/bbl are below the current Brent oil price of US$67-68/bbl.
  • For the not-yet-matured fuel derivatives for FY22-25F, we expect SIA to book mark-to-market (MTM) gains into its FY21F B/S reserves with respect to the actual hedges against its expected future jet fuel consumption, and MTM profits on its 4QFY21F P&L with respect to the over-hedged FY22F position. As a result of this, we raise our SIA's FY22F adjusted BVPS estimate by 9% to account for fuel derivative MTM gains, reflecting current forward average Brent prices of US$65/bbl for FY22F, US$61/bbl for FY23F, US$58/bbl for FY24F, and US$57/bbl for FY25F.

We urge caution as SIA share price closes in on the pre-COVID-19 level

  • In addition to our 9% higher FY22F BVPS estimate, we have also increased our target FY22F P/BV from 0.94x (historical mean since 2011) to 1.06x (+1 s.d. above mean), to reflect investors’ willingness to pay for recovery plays. This takes our new target price to S$6, which is only 6.5% below the high of S$6.42 on 2 Jan 2020 (adjusted retrospectively for the May 2020 rights issue), prior to the outbreak of the pandemic. This reflects SIA’s strong financial position, underwritten by support from Temasek.
  • By comparison, Cathay Pacific is still trading 20% below its early-2020 level.
  • Upside risks include a potential quarterly profit for SIA in 4QFY21F due to MTM gains, very strong cargo demand in 4QFY21F due to the Lunar New Year rush, and likely meaningful reopening of borders from 3QFY22F.
  • However, beyond the MTM gains, the long road to full demand recovery may temper investors’ expectations and pose downside risks to SIA's share price.

SIA target price

  • See SIA Share Price; SIA Target Price; SIA Analyst Reports; SIA Dividend History; SIA Announcements; SIA Latest News.
  • Our target price of S$6 is based on a target P/BV multiple of 1.06x (+1 standard deviation above the 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. Refer to Fig6 in report attached below for SIA's equity and debt capital raising exercises since the start of the COVID-19 global pandemic.
  • 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. Refer to report attached below for details on target price computation.

Raymond YAP CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-03-18
SGX Stock Analyst Report HOLD DOWNGRADE ADD 6.00 UP 4.890