Singapore Airlines - DBS Research 2022-05-17: Ready To Conquer The Skies Again

Singapore Airlines - Ready To Conquer The Skies Again

  • SIA (SGX:C6L) ’s international passenger traffic has been recovering at a faster clip than its peers since Singapore launched its first VTL in September 21. We expect this trend to persist and envisage the group’s passenger volumes hitting 70% and 96% of pre-pandemic levels in 4QFY23F (March 23) and 4QFY24F (March 24), respectively, supported by Singapore’s new Vaccinated Travel Framework and the synchronised reopening of borders in the region.
  • Favourable supply-demand dynamics to underpin healthy passenger and cargo yields. Colossal pent-up travel demand and the gradual restoration of passenger capacity will support passenger yields.
  • Air cargo demand was recently hit by weak manufacturing growth/contraction and lockdowns in China. However, air freight rates should remain strong for the rest of 2022, as the Russia-Ukraine conflict adds further strain to an already stretched global supply chain. Looking further into 2023, air freight rates will likely trend down, as supply chain bottlenecks are resolved and the air cargo capacity crunch is alleviated with the return of belly-hold cargo capacity. Nonetheless, they should stay above pre-pandemic levels given fundamental changes accelerated by the pandemic, like the advent of e-commerce.
  • SIA is more insulated than its peers in an inflationary environment because of its fuel hedging position and cost transformation efforts. Singapore jet fuel prices surged dramatically in 2022 and are currently 60%-70% above pre-crisis levels at US$130-140 per bbl after peaking at US$150 per bbl in early May 2022. This is certainly problematic for airlines, given that jet fuel typically accounts for 20%-30% of total operating costs. On a positive note, SIA will be less impacted than most peers in the region, given a slight improvement in its fuel efficiency (younger fleet), and the airline has hedged about 40% of its projected jet fuel consumption in the short term.
  • Furthermore, we anticipate continued improvement in SIA’s ex-fuel unit costs, as passenger load factors rise, and the airline reaps the benefits of multiple cost initiatives under its new transformation programme. Initiatives include digitalisation to enhance business processes and the introduction of new technology to reduce manpower.
  • SIA’s valuation may be above its historical mean, but it is still cheaper than competitors in the region. The airline is currently priced at 1.1x FY23F P/BV, at around +0.5 standard deviation above its 10-year mean. We believe that its relatively promising recovery trajectory and medium-term outlook justify a multiple that is on par with its peers.
  • We are lifting our FY23/24F net profit estimates for SIA to S$500m/S$1,067m to reflect the above-mentioned positive developments. Additionally, we are raising our target price for SIA to S$6.20 as we roll forward and boost our P/BV peg to 1.3x FY23/24F adjusted book value (1.2x previously, which is +1.5 standard deviation above the stock’s 10-year mean P/BV), to factor SIA’s brighter recovery and medium-term growth outlook.
  • We treat the MCBs as debt instead of equity, as we see SIA redeeming the MCBs within 10 years, and deduct the accrued interest at end-FY23/24F.
  • SIA's share price performance has been lagging other aviation counters in 2022 year-to-date, but we believe that a re-rating is right around the corner as the airline returns into the black in FY23F, and greater clarity on its longer-term growth prospects.

Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @

Paul YONG CFA DBS Group Research | Jason SUM DBS Research | 2022-05-17
SGX Stock Analyst Report BUY UPGRADE HOLD 6.20 UP 4.900

Read also DBS Research's most recent report:
2022-11-08 Singapore Airlines - Defying Recessionary Fears

Target prices by 2 other brokers at SIA Target Prices.
Listing of broker reports at SIA Analyst Report.

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