Singapore Airlines - DBS Research 2022-11-08: Defying Recessionary Fears

• Singapore Airlines (SIA)'s 2QFY23 net income of S$556.5m (+50.2% q-o-q, vs net loss of S$427.6m in 2QFY22) surpassed expectations. 1HFY23 net income amounted to S$926.9m, accounting for 60%/79% of DBS/consensus’ full-year estimate respectively. Operating profit of S$678.0 represents a new quarterly high for the group. See SIA's announcement dated 04 Nov 2022.
• SIA's 2QFY23 revenue of S$2,471.9m was up 14.8% q-o-q and 192.9% y-o-y, primarily driven by a significant rebound in passenger revenue (+23.6% q-o-q, +659.8% y-o-y) on the back of record passenger load factors and elevated passenger yields, partly offset by softer cargo revenue (-8.5% q-o-q, +0.4% y-o-y) as cargo rates declined amid softer demand.
• Overall operating metrics were robust, with passenger capacity reaching ~67% of pre-pandemic levels during the quarter, passenger load factors topping previous records (86.5% during the quarter), and passenger yields strengthening slightly on a sequential basis.
• Interim dividend of S$0.10 per share was declared by SIA for the first time since the pandemic began, which is a positive surprise to the market. See SIA's dividend history.

SIA – Outlook and investment recommendation

• Forward booking data appears promising. SIA's management shared that forward booking data suggests that travel demand will remain resilient going into the upcoming peak holiday travel season, and although booking windows remain relatively short, the response for travel promotions in early 2023 are quite encouraging. Additionally, business travel activity also saw solid traction during the quarter. SIA has maintained its passenger capacity guidance at 81% of pre-COVID-19 levels by Dec 22, but capacity will average 76% in 2HFY24 as the group matches supply with variations in monthly demand.
• Air cargo rates expected to moderate, but should stay well above pre-pandemic levels. Macroeconomic headwinds coupled with the addition of bellyhold cargo capacity (as more passenger aircraft return to the skies) will weigh on air freight rates. However, we believe that it should take some time for air freight rates to normalise because capacity remains tight with international flight activity in Asia still far from pre-pandemic levels, while strong e-commerce demand should also act as a buffer.
• Capex to be pushed back due to production constraints faced by Boeing and Airbus. Capex in 1HFY23 declined on a y-o-y basis, largely the function of delivery delays from Boeing and Airbus. Looking ahead, we believe that supply chain disruptions faced by the OEMs could persist well into 2023, which suggests that SIA’s near-term capex should be lower than its previous guidance of S$4.0-4.5bn per annum. Slower receipt of new aircraft also indicates that SIA will likely retain its older aircraft for longer to meet capacity requirements.
• Fuel hedging ratio to taper off after 1QFY24. SIA remains 40% hedged at US$60/bbl of Brent until 1QFY24. Subsequently, SIA is hedged up to 10% until 4QFY25, but at a considerably higher Brent crude oil price of US$80/bbl, with S$110m in gains from the closing of earlier positions to be recognised over FY24-FY25.
• While this means that SIA will realise lower fuel hedging gains over the next few years, we believe that the negative impact to its operating margins will be largely tempered by higher passenger traffic and sustained strength in passenger yields.
• Redemption of second tranche of MCBs. SIA's management shared that there are no definitive plans as of now, as there continues to be considerable macroeconomic uncertainty, despite the positive recovery momentum the group is seeing. Nonetheless, we remain confident that SIA is well on track to redeem the remaining MCBs before the step up in its yield, which is slated to occur in FY26F (2025).
• We raise our FY23/24F net profit estimates for SIA up by 4.6%/0.9% to reflect higher passenger yields and load factors, though partially offset by slower capacity growth due to the lack of visibility on China’s reopening timeline. Maintain BUY recommendation on SIA with an unchanged target price of S$6.60, as we roll forward our EV/EBITDA peg to 6.0x (+0.5 standard deviation above 3-year pre-pandemic level) FY24F EBITDA from 6.5x blended FY23/24F EBITDA previously.
• Our earnings estimates are above the consensus, as we expect SIA’s passenger volumes to normalise at a faster rate and assumed higher passenger and cargo yields.