Singapore Airlines - Multiple Risks Cloud Strong Revenue Trend
- High rates of global inflation, from higher food and fuel prices, and higher global interest rates are eating into consumers’ spending power, and overseas discretionary leisure travel could suffer in the future. A global recession in the future is a rising possibility, and if consumer spending falls, air cargo demand may also decline. As SIA (SGX:C6L)’s competitors ramp up their capacity deployment in the future, SIA’s heightened market share could fall back down to 2019 averages. This may cause the current high airfares to moderate, even if jet fuel price levels remain elevated.
- While SIA is 40% hedged at Brent price of US$60/bbl until Jun 2023, Brent is already at US$125/bbl and SIA is exposed to the jet fuel crack spread, which has widened from US$2/bbl a year ago to US$38/bbl now.
- Our analysis suggests that SIA may be keen to redeem half of its S$9.7bn MCBs within the next 2-3 years, before their yields rise from 4% to 5% p.a., as it is holding too much cash, in our view, with a net debt position of only 8.5% as at 31 Mar 2022 vs 32% as at 31 Dec 2020 (prior to the pandemic). Redeeming part of the MCBs will reduce SIA’s shareholders’ equity and make SIA’s P/BV valuations look more expensive, which is another downside risk factor for investors to consider.
- We reiterate our HOLD call on SIA. Our target price for SIA is reduced to S$5.75, after cutting FY23-34F EPS forecasts for higher oil prices and applying a lower FY23F P/BV of 0.95x (mean since 2011). We previously used a higher P/BV multiple of 0.98x (+0.5 s.d.) but now adopt a lower multiple as inflation may hurt discretionary travel demand in future.
Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.
Raymond YAP CFA CGS-CIMB Research | https://www.cgs-cimb.com 2022-06-13 2022-06-13
Read also CGS-CIMB's most recent report:
2023-01-16 Singapore Airlines (SIA) - Time To Pocket Share Price Gains.
Previous report by CGS-CIMB:
2022-12-06 Singapore Airlines - Merger Of Vistara & Air India ~ Better Than Standing Alone.