Singapore Airlines (SIA) - UOB Kay Hian 2022-11-08: 1HFY23 Results Broadly In Line; Expecting Peak Performance In The Next Quarter

Singapore Airlines (SIA) - 1HFY23 Results Broadly In Line; Expecting Peak Performance In The Next Quarter

  • SIA’s 1HFY23 operating profit of S$1.23b was broadly in line at 45% of our full-year forecast, but net profit of S$927m was slightly ahead of our projection at 50% of our full-year forecast.
  • Advance sales as at end-1HFY23 were at 40% above pre-pandemic levels, indicating a very strong 3QFY23 financial performance. Beyond 3QFY23, we expect SIA’s financial performance to start to normalise as competition catches up and drives down yields.
  • Maintain HOLD on SIA with an unchanged target price of S$5.18.

SIA's results broadly in line.

  • Singapore Airlines (SIA, SGX:C6L)’ 1HFY23 (2QFY23) operating profit of S$1.23b (S$678m) was the highest in SIA’s history. See SIA's announcement dated 04 Nov 2022.
  • 1HFY23 operating profit was broadly in line with our expectations, at 45% of our full-year forecast. 1HFY23 net profit of S$927m was deemed slightly ahead of our projection, at 50% of our full-year forecast, as we expect 2HFY23 to be overall stronger than 1HFY23.
  • The surprise was mainly from the higher interest income (S$103m, +427% y-o-y), due to the boost in SIA’s cash balance as a result of the strong advance sales of air tickets. In 1HFY23, SIA benefitted from fuel hedge gain of S$417m, in line with our forecast.
  • Passenger business continued to recover. Pax flown revenue rose 23.5% q-o-q to S$3.3b in 2QFY23 (1QFY23: S$2.8b), driven by a 22.0% q-o-q growth in pax load and a 1.2% growth in pax yields (11.9 cents per pax-km in 2QFY23 vs 11.7 in 1QFY23). In 2QFY23, SIA’s pax capacity recovered to 67.6% of pre-pandemic levels while the pax load factor was already slightly above the pre-pandemic levels, standing at 86.6% in 2QFY23.
  • Cargo business showed early signs of normalisation. Cargo revenue fell 8.5% q-o-q to S$1.0b in 2QFY23 (1QFY23: S$1.1b), on the back of lower cargo load (-2.9% q-o-q) and lower cargo yields (-5.7%) y-o-y. As of end-2QFY23, cargo load factor was 57%, already close to pre-pandemic levels, while 2QFY23 cargo yield of 75.4 cents per tonne-km was still significantly above the 30-ish level before the pandemic.
  • Strengthened balance sheet, resumption of dividend payment. Driven by improved profitability and strong advance ticket sales, SIA’s net gearing continued to come down. Even with all outstanding mandatory convertible bonds (MCB) treated as debt, SIA’s net gearing was at a healthy 33.8%.
  • SIA declared an interim dividend of 10 cents. See SIA's Dividend History.

Advance sales indicating an exceptionally strong 3Q.

  • Sales in advance of carriage, a leading indicator for near-term revenue recognition, stood at S$4.16b as at end-1HFY23; this was about 40% above the end-1HFY20 (pre-pandemic) levels, even though 3QFY23 pax load, by our estimate, would be only at about 80% of 3QFY20 (i.e. Oct-Dec 19) levels. This implies an exceptionally strong financial performance for the upcoming 3QFY23.
  • Profitability expected to slow down after 3QFY23. The normalisation of cargo yields has already started and is expected to accelerate in 3QFY23, though we expect the exceptional pax business performance to more than offset any weakness in the cargo performance.
  • Looking ahead, we expect SIA's pax business profitability to also slow down, as competition catches up and drives down pax yields to more normalised levels.

Update on SIA's fuel hedge position.

  • SIA has entered into a new fuel hedge position, hedging up to 10% of the projected fuel consumption on declining wedge profile between 2Q-4QFY24 at an average price US$80 per barrel (based on Brent crude oil price). This adds to SIA’s existing position of hedging 40% of its projected fuel consumption till 1QFY24 (at Brent crude oil price of US$60 per barrel).
  • We note that the new hedging contracts are already in the money today, given that Brent crude oil currently stands at about US$98 dollar per barrel.

SIA – Earnings forecast revision & recommendation

  • We raise our FY23 earnings forecast for SIA by 24.2% to S$2.30b from previously S$1.85b as we expect an exceptionally strong 3QFY23. We keep our FY24-25 forecasts intact.
  • Valuation is stretched; maintain HOLD on SIA with an unchanged target price of S$5.18. Our target price is now based on 1.10x FY24F P/B which is 1.5 standard deviation above SIA’s historical average of 0.97x in pre-pandemic years.
  • The current SIA's Share Price of S$5.41 implies a 1.15x FY24 P/B or 2.0 standard deviation above historical average.
  • Catalysts:
    • High sentiment in anticipation of a stellar 3QFY23 financial performance.
    • Possible shifts in China's stance in treating COVID-19.
  • Key risks:
    • Air traffic recovery losing steam beyond FY23,
    • a possible recession impacting air travel demand, and
    • increasing competition from competitors adding capacities.

Roy Chen CFA UOB Kay Hian Research | 2022-11-08

Read also UOB's most recent report:
2022-12-01 Singapore Airlines (SIA) - Potential Merger Of Vistara Into Air India A Positive Development.

Price targets by 3 other brokers at SIA Target Prices.
Listing of research reports at SIA Analyst Reports.

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

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