Analysts all upbeat on SIA as final dividend came as a ‘positive surprise’; UOB Kay Hian upgrades to ‘hold’

The analysts' target prices range from $5.75 to $6.80.

Analysts are all upbeat on Singapore Airlines’ (SIA) C6L prospects after the airline posted a record set of earnings for the FY2022/FY2023 ended March 31 on May 16.

UOB Kay Hian analyst Roy Chen has upgraded his call to “hold” with a higher target price of $5.75 from $5.35 previously as SIA’s final dividend of 28 cents came as a “positive surprise”. Including its interim dividend of 10 cents, SIA’s total dividend of 38 cents for the year translates to a yield of 6.3%, Chen points out.

“Our new target price is based on an FY2024 P/B of 1.19x, 1 standard deviation or s.d. above SIA’s historical mean P/B of 1.03x since FY2010,” he writes.

While SIA’s core net profit for the year stood within Chen’s expectations at 99% of his full-year estimates, the analyst sees that core profitability has peaked for the airline with q-o-q declines in the 4QFY2023.

“[The airline’s] core net profit declined 21.7% to $518 million in 4QFY2023 by our estimate (3QFY2023: $661 million), on the back of lower core ebit (-25.5% q-o-q),” he says.

“Other than some seasonality factors, the q-o-q profit decline was also attributable to normalising pax yields, declining cargo yields, and slower cargo volume. Group revenue declined 6.9% q-o-q in 4QFY2023, driven by lower revenue of both pax and cargo operations. Pax revenue declined 3.9% q-o-q, driven by normalising pax yields (-6.3% q-o-q), despite pax volume continuing to improve (+2.5% q-o-q). Cargo revenue declined 42.3% y-o-y (25.4% q-o-q), driven by both weaker air cargo demand and fast moderating yields,” he adds.

He also notes that even though the recovery in air travel is on the mend, its momentum is moderating. SIA had guided for its passenger capacity to recover to around 83% in the 1HFY2024 and 90% by the end of FY2024, compared to the 77% in 4QFY2023. A full recovery is expected to take place in FY2025.

To this end, Chen is expecting SIA’s core net profit to moderate moving forward. The analyst has estimated that the airline’s net profit for the FY2024 and FY2025 will fall by 19.4% and 29.8% y-o-y respectively, driven mainly by normalising pax and cargo yields (as the competition catches up), coupled with SIA’s high operating leverage.

Similarly, the airline’s dividend is also likely to moderate along with the normalisation of its profit.

“Having said that, with SIA’s strong balance sheet, we believe it can sustain a 70% payout ratio, in line with the 65%-70% payout ratio SIA used to maintain before the pandemic. The 70% payout ratio would lead to a yearly dividend of 35/22 cents or 5.8%/3.7% yield in FY2024/FY2025 based our profit projections,” says Chen.

For the FY2022/FY2023, SIA’s balance sheet stood stronger than its pre-pandemic figures with a net gearing of just 8% as at end-FY2023, with all of SIA’s outstanding mandatory convertible bonds (MCBs) regarded as debt. “This was already lower compared to the 26% net gearing as at end-FY2019”, Chen notes.

The analyst has kept his net profit forecast unchanged for the FY2024 but has raised his FY2025 forecast to $945 million from $821 million previously. This comes as he tweaks his net interest cost projection reflecting a delayed capital expenditure (capex) plan.

CGS-CIMB Research analyst Raymond Yap has kept his “hold” call on SIA with a slightly higher target price of $6.15 and $6.14 as he sees the airline’s share price being supported by the “strong” final dividend of 28 cents.

That said, he notes that SIA’s core net profit for the FY2022/FY2023 stood 2% below his full-year forecasts due to the higher-than-expected operating costs at Scoot.

However, he acknowledges that the outlook for SIA looks better than his earlier expectations and are likely to be “stronger for longer”. As such, he has upped his core net profit forecasts for the FY2024 to FY2025 by 20% to 22%. The raised forecasts come on account of lower jet fuel price forecasts, partially offset by lower cargo yields, explains Yap.

Like UOB Kay Hian’s Chen, Yap is expecting to see a moderation in SIA’s passenger yields in the years ahead due to the price competition from other airlines that are gradually ramping up capacity.

“All things considered, we forecast SIA to report a core net profit of $1.3 billion in FY2024, down 35% from FY2023’s $1.9 billion, while we think SIA’s FY2025 core net profit could decline another 22% to $993 million,” he writes.

Looking ahead, Yap is expecting SIA’s historical P/BV multiple to hit 1.05x once the airline completes the announced redemption of $3.1 billion in MCBs in June 2023. “This is +1 s.d. from the mean of 0.9x since FY2011, which is usually when SIA’s share price tops out,” he says.

“Nevertheless, we expect SIA’s strong results and the upcoming 28 cents final dividend to keep the share price elevated for now,” he adds.

OCBC Investment Research analyst Ada Lim has also kept her "hold" call with a higher fair value estimate of $6.50 from $6.47 previously.

Though the higher fair value estimate comes as Lim raises her target P/B ratio to 1.0x from 0.9x, the partial redemption of the aggregate principal amount of SIA's MCBs will require a cash outlay of $3.36 billion. This will reduce the MCB balance by $3.1 billion and, in turn, lead to an "inadvertent reduction in the existing fair value estimate", says Lim. The airline made the announcement that it will be redeeming 50% of its MCBs at 8% above par on June 24.

"However, given that the redemption sends a positive signal of SIA’s financial strength to the market, and that it reduces the dilutive effect of the MCBs to existing shareholders, we think it is fair to raise our target P/B ratio from 0.9x to 1.0x," she adds.

In her report, Lim notes that SIA is in a good place and is well-positioned to ride out any potential normalisation in demand and prices as its management remains committed to the SIA brand promise of providing service excellence, product leadership, and network connectivity.

"We also note that there could be further legs to the recovery as Chinese international travel activity rebounds more meaningfully in the second half of the year, given that the group is looking to expand its services to China by resuming Scoot flights to cities like Jinan (July 2023) and Nanchang (August 2023), and increasing flight frequencies to key cities such as Fuzhou, Guangzhou, and Hangzhou," she writes.

‘Buy’ calls from DBS and Citi

DBS Group Research analysts Paul Yong, Jason Sum and Tabitha Foo have kept their “buy” calls after SIA’s record earnings, with an unchanged target price of $6.80, which is above the consensus average and the highest among the analysts so far.

One of the upside factors, in the DBS team’s view, is the promising earnings outlook on China’s reopening and capacity discipline.

“The normalisation of travel demand is expected to accelerate due to China’s (10%-15% of passenger traffic in FY2019) sudden pivot from its zero-Covid stance and reopening of international borders. However, SIA intends to maintain a disciplined approach in reinstating capacity to optimise pricing power,” writes the team.

“As a result, we anticipate passenger yields to remain at elevated levels for some time (albeit moderating on stiffer competition) on the back of revenge travel, continued resumption of corporate travel and measured capacity growth by competitors,” it adds.

To the team, SIA’s continued earnings outperformance is expected to drive a re-rating in its shares in the near-term.

“We believe recessionary fears are overblown and the street is severely underestimating SIA’s earnings potential. We continue to have above consensus earnings projections and believe that SIA will continue to deliver positive surprises in the near-term to catalyse a re-rating,” it says.

Citi Research analysts Kaseedit Choonnawat and Lu Xu have also kept their “buy” call after SIA’s core earnings for the FY2022/FY2023 stood 4% above their estimates. The analysts have also kept their target price unchanged at $6.41 after the airline gave positive guidance for passenger demand in June 2023, which is primarily driven by East Asia.

“Forward sales are healthy across all cabin class, led by bookings up-tick to China, Japan and South Korea. The visibility is incrementally in-line with pre-Covid’s average forward sales of [around] two months per our estimate,” say the analysts.

They add: “Yield is inevitably normalising, but likely at a slow pace per our booking exercise in April where Lufthansa is guiding for yield at [around] 25% above pre-Covid in June 2023 as a reference point.”

On cargo, SIA has guided for softer demand in the near-term and the returns of belly space to put “downward pressure” on its yield. However, Choonnawat and Lu point out that SIA has been gaining shares given earlier starts than competitors.

“We see room for consensus to revise up FY2023/FY2024 core earnings where we are 16% above. Air India’s FY2023 financials could logically provide upside surprises given strong pent-up demand where India’s aviation industry recently saw further consolidation from Go First‘s application for voluntary insolvency resolution proceedings,” they write.

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