Singapore Airlines - Huge 2QFY23 Profit; 3Q To Be Even Bigger?
- SIA (SGX:C6L)’s 2QFY23 (Jul to Sep 2022) core net profit widened to S$493m (from S$322m profit in 1QFY23), due to
- a significant q-o-q increase in SQ (SIA's mainline carrier)’s EBIT; while
- Scoot (SIA's low-cost carrier) became profitable for the first time in 17 quarters, but partially offset by
- a q-o-q decline in cargo profits due to the summer lull, global slowdown in consumer buying as a consequence of inflation, and more competition as other airlines reinstate their networks.
- SQ contributed S$301m of SIA’s S$678m EBIT in 2QFY23, with cargo contributing S$383m, and Scoot a much smaller S$12m.
- SIA’s 1HFY23 core net profit of S$814m was a substantial turnaround from the S$261m loss in 2HFY22. 2QFY23 was one of SIA’s most profitable quarters.
- SIA declared a S$0.10 dividend, the first in more than two years, suggesting confidence in its forward outlook; we now pencil in a dividend payout ratio of ~50% for FY23-25F, with our FY23F forecast dividend of S$0.32 providing a yield of 6%.
- Despite the weaker air freight market, the focus in 1HFY23 was clearly the sharp rise in passenger demand; SQ saw RPK (Revenue passenger kilometre) demand, PLF (Passenger load factor) and yields all rise q-o-q in 2QFY23, though Scoot allowed its yields to fall 6% q-o-q to drive up demand and loads q-o-q.
- SIA generated an operating cash surplus of S$2.5bn for 1HFY23 (excluding forward sales) vs the pre-pandemic 1HFY20 operating cash surplus of S$1.45bn (Apr-Sep 2019), which reflects the fact that despite the 31% lower ASK (Available seat kilometre capacity) capacity in 1HFY23 vs 1HFY20, SIA generated roughly the same turnover due to the 30% yield improvement.
- The outlook for SQ and Scoot for the rest of 2HFY23F looks very strong, with SIA saying that forward sales will likely remain “buoyant in the coming months leading up to the Lunar New Year period”. The reopening of Taiwan, Hong Kong and Japan in Sep/Oct is also in time for the year-end travel peak.
- SIA may have pre-sold half of the next six months’ seat capacity. As evidence, we highlight that forward sales ballooned to S$4.2bn as at 30 Sep 2022 (vs. S$2.1bn as at 31 Mar 2022), or half of the 1HFY23 revenue base and larger than the S$3bn forward sales as at 30 Sep 2019, with the latter ‘just’ 36% of the 1HFY20 revenue base.
- Because of SIA’s substantial gross cash balance of S$17.5bn as at 30 Sep 2022, on 8 Dec 2022 SIA will redeem S$3.5bn of its S$9.7bn MCBs; we expect SIA to redeem a further S$1.35bn in the next 12 months to take the total redemption to half of the MCBs.
- The key downside risk is the potential for weaker cargo profits in 2HFY23F; SIA guides for a muted peak season and we also project weaker cargo yields due to rising competition from other airlines and because container freight rates have collapsed.
- Reiterate ADD on SIA as we expect demand over the next six months to remain robust while consensus will likely have to upgrade its forecasts significantly. We lower our target price to S$5.97 (CY24F P/BV of 0.9x, mean) but with a new FY23F dividend of S$0.32, which raises total return to 18%.
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 2022-11-07 2022-11-07
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.