SINGAPORE AIRLINES LTD (SGX:C6L)
Singapore Airlines (SIA) - At 1.6x FY22’s Book Value (Ex-MCB), SIA Is Anything But Cheap
- From 4Q20, SIA's share price has tracked the US Global Jets (JETS) ETF, and its stock price is only about 7% away from pre-COVID-19 levels. Excluding S$6.2b in MCB which is recognised as equity, SIA's share price is trading at about 1.6x FY22’s book value or about 70% premium to pre-COVID-19 levels. We are also now less optimistic of a traffic recovery by 3Q21 and have lowered pax traffic growth assumption for FY22 by 34% and pax load factor assumption by 4ppt.
- Downgrade SIA (SGX:C6L) to SELL. Target price: S$4.40.
As at 12 Apr 2021, SIA's share price has risen by 30.8% year-to-date, outperforming the FSSTI’s 11.6% gain over the same period.
- Singapore Airlines (SIA)'s share price is also only about 7% below pre-COVID-19 (21 Feb 20) levels, although its market capitalisation is significantly higher. The JETS ETF, which invests in global airlines, is about 10% below pre-COVID-19 levels Underpinning the recovery in stock prices are:
- optimism about the delivery of vaccines, and
- formation of travel bubbles and an eventual opening up of borders, leading to a recovery in traffic.
- SIA's share price has rallied at a faster pace than the JETS ETF Index, due to optimism on rapid vaccination rates and the formation of travel bubbles.
The economic reality however is not as rosy as airlines are still facing bankruptcy or are being bailed out a year after the onset of COVID-19.
- Air-France KLM is seeking €4b in state aid and potentially further capital from other parties, including China Eastern Airlines. IATA has also estimated that airlines could burn through US$75m-95m in cash for 2021.
Rollout of digital travel passport would not spur border openings.
- Singapore is expected to roll out checkpoints at Changi Airport. Singapore currently only allows air travel under reciprocal green lanes scheme (RGL) for two countries and Air Travel Pass scheme for five countries.
Low rates of vaccination outside of Singapore, concerns over new COVID-19 strains and high numbers of imported cases could delay border openings and travel demand.
- Singapore is expected to complete reluctant to open up more travel lanes.
- A survey conducted by travel technology firm, Amadeus, also stated that only 23% of Singaporeans expressed willingness to travel within six weeks of removal of border restrictions.
SIA - Earnings revision & Recommendation
SIA’s stock price has run ahead of foreseeable fundamentals; downgrade to SELL.
- We believe that much of the re-rating on SIA's share price was led by ETF cash burn of about S$200m-250m. SIA had also guided for S$4b capex for FY22 and another S$4.5b in FY23. Assuming that capex is distributed evenly, at half year FY22, SIA could have utilised at least S$3.8b in cash or 30% of its liquid funds.
- A key uncertainty is whether SIA will exercise the option to tap into another S$6.7b in mandatory convertible bonds (MCB). The option will expire by Jul 21. Given these uncertainties, we downgrade SIA to SELL with a target price of S$4.40.
- See
- SIA is highlighted as one of the stocks that saw institutional and retail opinions diverge in March 2021. See report: Singapore Fund Flow - UOB Kay HIan 2021-04-13: Banking & Shipbuilding Sectors Saw The Most Fund Inflows By Institutions In March 2021.
- SIA is also included in UOBKH's Singapore stock alpha picks with SELL call. See recent report: Singapore Stock Alpha Picks (April 2021) - UOB Kay Hian 2021-04-06: Adding UMS, Removing Frencken.
K Ajith
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-04-14
SGX Stock
Analyst Report
4.40
DOWN
4.470
