Singapore Airlines - CGS-CIMB Research 2022-07-29: Excellent 1Q23; All The Pieces Fall Into Place

Singapore Airlines - Excellent 1Q23; All The Pieces Fall Into Place

SINGAPORE AIRLINES LTD (SGX:C6L) | SGinvestors.ioSINGAPORE AIRLINES LTD (SGX:C6L)
  • Singapore Airlines (SIA, SGX:C6L)’s 1QFY23 (1 Apr 2022 to 30 Jun 2022) core net profit of S$322m outperformed expectations as it made up 55% of our previous FY23F estimate and 96% of Bloomberg consensus. This was mainly due to the reopening of Singapore’s borders from 1 Apr 2022 catalysed a doubling of SQ’s RPK (revenue passenger kilometre) demand in 1Q23 from the immediately-preceding 4Q22, with PLF (passenger load factor) rising from 49% to 82.4%.
  • The SIA group’s ASK (available seat kilometre) capacity rose from 4Q22’s 52% of the pre-pandemic base to 1Q23’s 66% and we forecast further recovery to 73% in 2Q23F and to 79% in 3Q23F, based on SIA’s guidance. These percentages are measured against the equivalent pre-pandemic quarter in CY19. A future reopening of China’s borders will likely fill in the remaining gap, in our view.
  • For now, SIA expects travel demand to be robust through to the year-end holiday period, with forward sales buoyant for the next three months to Oct 2022F. This suggests that SIA’s strong 1Q23 performance will likely be repeated in upcoming quarters as SIA has promised to keep a tight rein on non-fuel operating costs.
  • Reiterate HOLD call on SIA with a higher target price of S$5.89 (at mean FY23F P/BV of 0.95x) as we raise our FY23F core net profit forecast by 84%, still based on an unchanged target P/BV multiple of 0.95x (mean since 2011), applied to the end-FY23F adjusted BVPS (book value per share). Our reported BVPS forecasts treat the S$9,693m mandatory convertible bonds (MCB) as wholly equity, in line with the accounting treatment adopted by SIA.
  • We are applying the P/BV mean to derive our target price for SIA because we think that the risks and rewards of owning the stock are now in balance – with strong near-term demand, high airfares and increased market shares across most regions potentially offsetting higher operating costs from pilot salary restoration and the spike in jet fuel prices.
  • Downside risks include higher oil prices with SIA only 40% hedged until Jun 2023F and stronger competition as other airlines ramp up their capacity restoration; we have modelled this scenario in our FY24-25F forecasts, which reflect lower earnings.
  • SIA likely to redeem half of the MCBs, in our view.
    • The first tranche of the MCBs of S$3.5bn was issued on 8 June 2020, and:
      • If redeemed before its 4th anniversary on 8 June 2024, SIA will pay a yield of 4% from the time of issue;
      • If redeemed before the 7th anniversary on 8 June 2027, SIA will pay a yield of 5% p.a. from the time of issue; and
      • If redeemed before the 10th anniversary on 8 June 2030, SIA will pay a yield of 6% p.a. from the time of issue.
    • The second MCB tranche of S$6.2bn was issued on 24 June 2021, and:
      • If redeemed before its 4th anniversary on 24 June 2025, SIA will pay a yield of 4% p.a. from the time of issue;
      • If redeemed before the 7th anniversary on 24 June 2028, SIA will pay a yield of 5% p.a. from the time of issue; and
      • If redeemed before 8 June 2030 (approximately the 9th anniversary), SIA will pay a yield of 6% p.a. from the time of issue.
  • The rise in the yield from 4% to 5% effective 8 June 2024 (for the first tranche) and 24 June 2025 (for the second tranche) suggests that SIA will likely redeem at least some of the MCBs prior to the MCBs’ 4th anniversary dates.
  • SIA had a gross cash pile of S$16.1bn as at 30 June 2022, and a debt balance of S$15.7bn (including straight bank debt, lease liabilities and convertible bonds), representing a net cash balance of S$0.4bn, a position that SIA had not enjoyed for years, even prior to the start of the COVID-19 pandemic.




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 2022-07-29
SGX Stock Analyst Report HOLD MAINTAIN HOLD 5.89 UP 5.750




Read also CGS-CIMB's most recent report:
2022-11-08 Singapore Airlines - Enumerating Downside Risks To SIA; Exceptional FY23 Not Likely Repeatable

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

Relevant links:
SIA Share Price History,
SIA Announcements,
SIA Dividends & Corp Actions,
SIA News Articles





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