Singapore Aviation Stocks - UOB Kay Hian 2022-04-25: A Potentially Steeper-Than-Expected Recovery Trajectory

SINGAPORE AIRLINES LTD (SGX:C6L) SATS LTD. (SGX:S58) SIA ENGINEERING CO LTD (SGX:S59)

Singapore Aviation Stocks - A Potentially Steeper-Than-Expected Recovery Trajectory

Mar 22 air traffic data at Changi Airport and operating data of Singapore Airlines beat our forecasts, even before the positive impacts from the border measure relaxations kicked in. Singapore’s scraping of pre-departure test requirements for fully-vaccinated air travellers entering Singapore would further support a sector recovery.
Maintain MARKET WEIGHT on the sector.
Maintain BUY on SIA Engineering (SGX:S59) (new target price: S$2.90) and SATS (SGX:S58) (new target price: S$4.85) and HOLD on SIA (SGX:C6L) (new target price: S$4.85).

Mar 22 air traffic statistics at Changi Airport and operating data of Singapore Airlines (SIA) came in stronger than we have expected. While the paces of recovery in the flight activities and the passenger capacity reactivation were broadly in line, surprise mainly came from the passenger volume.
Changi airport passenger volume rose 62.2% m-o-m to 1,140,000 in Mar 22, which stood 19.2% of the pre-COVID-19 (Jan 20) level. National carrier SIA saw its passenger load rising 61.2% m-o-m in Mar 22, on the back of a 15.7% m-o-m increase in passenger capacity (ASK) and a significant 15.4%pt m-o-m improvement in passenger load factor.
The substantial improvement in Mar 22 operating statistics has been achieved even before the anticipated positive impacts of Singapore’s recent round of border measure relaxations (effective from Apr 22 onwards) kicked in. This is a sign that reaffirms the strong pend-up demand of air travel and points to a potentially steeper-than-expected recovery trajectory for the Singapore aviation sector.

Since 1 April, Singapore has scrapped the previous quota-based Vaccinated Travel Lane (VTL) arrangement and replaced it with a new Vaccinated Travel Framework (VTF) which allows fully-vaccinated travellers to enter Singapore free of quarantine and on-arrival tests. Last Friday (22 April), Singapore announced the further relaxation of its COVID-19 measures.
From 26 April onwards, pre-departure tests are no longer required for fully-vaccinated travellers and children aged 12 and below to enter Singapore. This will further ease entry process into Singapore.

According to a press release by Civil Aviation Authority of Singapore (CAAS) on 18 April, air passenger traffic in Singapore has reached 31% of the pre- COVID-19 levels in the week ending 17 April; this is compared with 19.2% for the whole month of March by our estimate.
CAAS also guided that Singapore is on track to achieve its goal to restore over 50% of pre-COVID-19 air travel passenger volume in 2022. In its most recent update, SIA guided that it would raise its passenger capacity to 61% of the pre-COVID-19 levels by May 22, compared with 51% in Mar 22.

Given the strong showing of Mar 22 operating statistics of Changi Airport and SIA and considering the further easing of travel restrictions effective from Apr 22, we have raised our FY22-24 net profit forecasts for SIA (SGX:C6L), SATS (SGX:S58) and SIA Engineering (SGX:S59) upward, to reflect a potential steeper recovery trajectory.

Despite the raised FY22-24 earnings projection for the three aviation plays, our forecasts beyond FY25 are lightly touched as the stronger-than-expected recovery in the near horizon does not necessarily lead to higher longer-term earnings potential.
We are still looking at FY25 as the year for the sector to see a full recovery, as some major markets in Northeast Asia (particularly China) are expected to lag behind in the trend of global opening-up.

We have retained our recommendations on SATS, SIA Engineering and SIA, with target prices uplifted by 4.3%, 3.6% and 1.0% respectively.
SIAEC and SATS are our preferred proxies to ride the sector recovery. SIA Engineering's share price and SATS's share price are trading at 15.9x and 18.7x FY25F (normalised year) P/E, standing at 1.9 standard deviation and 0.4 standard deviation below their FY14-19 (pre-COVID-19 years) average P/E of 23.2x and 19.9x, respectively.
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See also
MCBs, SIA’s legacy baggage from COVID-19. Despite possible positive earnings surprise for SIA, we maintain our case that the significant and potentially highly dilutive mandatory convertible bonds (MCB) have to be redeemed first, before SIA’s earnings recovery can deliver more meaningful valuation accretion to its common shareholders. Refer to our SIA re-initiation report dated 28 Mar 22 for more detailed discussion on the MCBs. SIA's share price is currently trading at 1.47x FY23F P/B, an unprecedentedly high level or +4.0 standard deviation above its historical average P/B of 0.79x.
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Key sector catalysts include positive news flow of Singapore air travel recovery and possible shifts in stance in treating COVD-19 by Northeast Asian countries (particularly China).

Slower-than-expected earnings recovery; a more infectious/fatal COVID-19 variant leading to rollback of the global economic reopening.

Roy Chen CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-04-25

SGX Stock Analyst Report HOLD MAINTAIN HOLD 4.85 UP 4.800

BUY MAINTAIN BUY 4.85 UP 4.650

BUY MAINTAIN BUY 2.90 UP 2.800