Singapore Airlines (SIA) - DBS Research 2021-07-28: Longer Term Recovery Priced In


Singapore Airlines (SIA) - Longer Term Recovery Priced In

  • Recovery path remains uncertain, but SIA has the balance sheet to wait it out.
  • Completion of S$6.2bn MCB issuance ensures the carrier has ample liquidity to position for an eventual recovery.
  • SIA is already trading at 1.2x FY23 P/B, indicating its longer-term recovery prospects are priced in.
  • Upgrade to HOLD with target price of S$4.90.

SIA's S$6.2bn MCB issuance completed

S$6.2bn issuance 94.8% taken up by Temasek.

  • SIA (SGX:C6L) completed its issuance of S$6.2bn in Mandatory Convertible Bonds (MCBs) on 24 June that was 94.8% taken up by Temasek (including ~ 55.4% of its pro-rata entitlement). The take-up rate by Temasek is comparable with the 1st tranche of ~ S$3.5bn of MCBs issued in June 2020, which saw Temasek take up ~ 95.9% of the issuance. In total, SIA has now S$9.7bn of MCBs issued.

Liquidity and cash significantly bolstered.

  • SIA reported a cash balance of ~S$7.8bn at the end of March 2021, and the MCB issuance will boost its pro-forma cash position to nearly S$14bn. Noting that the monthly cash burn for SIA has now moderated to S$100-150m per month, this strong cash position will not only help SIA navigate comfortably through the current COVID-19 crisis, but also help fund its on-going fleet renewal program to capture any market opportunities as and when international air travel does recover.

No immediate dilution from MCBs but the price will eventually have to be paid.

  • While there is no immediate dilution from these zero-coupon MCBs, the redemption price for the MCBs have been on the basis of a yield to call of 4% per annum for the first four years from the date of issuance (being June 2020), and 5% per annum for years 5 to 7 and 6% per annum for years 8 to 10. This means that the accrued annual interest cost for the S$9.7bn in the next 12 months would be ~ S$388m (~ S 13cts per share), and over S$400m in the subsequent 12 months. By year 10, the accrued interest cost for the MCBs would exceed S$7.1bn, if they are not redeemed by then.

Dilution from conversion of all the MCBs would also be massive.

  • If all the MCBs were allowed to convert at the end of year 10 (at the conversion price of S$4.84 per share), this would result in the issuance of ~ 3,479m shares, equivalent to 117% of the ordinary outstanding share capital of SIA or a more than doubling of the total number of shares in issue. This would also mean a more than four-fold increase in the total number of shares in issue compared to before the COVID-19 pandemic struck.

Would be cheaper to redeem and refinance the MCBs beyond year 4 using straight debt and/or equity, if circumstances allow.

  • Given the potential highly dilutive nature of the MCBs, we should expect that once international travel recovers more materially and the global pandemic situation has stabilized, that SIA would look to substantially redeem most or all of the MCBs, including potentially refinancing them using straight debt or even equity. These MCBs may be redeemed in part or in full, at SIA’s discretion, on every six-month anniversary of the issue date.

Earnings and valuation update

SIA expected to report deeper net losses in FY22F, though we still project the airline to return into the black in FY23F.

  • We now project SIA to post a net loss of S$1.2bn in FY22F, as compared to S$0.2bn previously. This largely stems from the epidemiological situation deteriorating beyond our initial expectations, dampening the prospects for the formation of travel corridors between Singapore and other countries, though this is tempered by a more robust than envisaged air cargo environment. However, our FY23F forecast remains largely unchanged, with SIA posting a modest net profit of S$0.3bn.
  • We still anticipate a meaningful uplift in air travel activity in FY23F (2022), driven by sustained momentum on the vaccination front. Singapore and key markets for SIA like Europe and North America are anticipated to pass the herd immunity threshold ( > 75-80% of population vaccinated) by late 2021, while other important markets like China, North Asia and the Pacific are expected to inoculate a critical proportion of their population by mid-late 2022. Accordingly, our current estimates point to the group’s RPK climbing to 20% of pre-crisis levels in Mar-22, and 80% in Mar-23.

Surge in crude oil prices will have limited near-term P&L impact; reversal of losses on hedges to bolster equity position.

  • SIA is still in an overhedged position (close to or even above 100% in FY22F) with regards to its jet fuel consumption due to hedging contracts entered prior to the crisis. Thus, the airline will be relatively less impacted than most peers by the bull run in the crude oil market.
  • Note that SIA had entered into various Brent hedges covering up to 55.6% of the group’s projected fuel consumption at US$57-62/bbl with maturities spanning to FY24/25. As per the airline’s latest sensitivity analysis, every US$1 increase in crude oil prices will translate into a S$119m increase in shareholder’s equity. Hence, we should see a significant write-back to its fair value reserves over the next two years on buoyant crude oil prices.

Upgrade to HOLD based on 1.2x FY23 P/B.

  • Our target price of S$4.90 is pegged to 1.2x (+1 standard deviation of 10-year mean) adjusted FY23F book value, assuming that 100% of the MCBs are redeemed and taking into account all accrued interest costs of the MCBs as at end FY23.
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  • While SIA is in a favourable position to ride the eventual recovery in international traffic with its strong liquidity position, we believe this has been largely priced into the current stock price at 1.2x P/B (our adjusted book value assumes all MCBs are redeemed and include implied accrued interest on the MCBs).

Paul YONG CFA DBS Group Research | Jason SUM DBS Research | https://www.dbsvickers.com/ 2021-07-28
SGX Stock Analyst Report HOLD UPGRADE FULLY VALUED 4.90 UP 3.600