Jovi Ho Published on Fri, Jul 30, 2021

Analysts are only just beginning to warm up to Singapore Airlines’ (SIA) turnaround, following its lowest quarterly loss in earnings before interest and taxes (EBIT) since the pandemic began. 

On July 29, SIA reported net losses of $409 million for 1QFY2022 ended June 30. This is a 63.6%, or $714 million, improvement from the $1.1 billion loss it had posted the year before.

In a July 28 note, DBS Group Research analysts Paul Yong and Jason Sum are upgrading SIA from “fully valued” to “hold”, with a raised target price of $4.90 from $3.60 previously. The new target price represents a 4% downside.

While the recovery path remains uncertain, SIA has the balance sheet to wait it out, write Yong and Sum. 

The issuance of $6.2 billion mandatory convertible bonds (MCBs) ensures SIA remains financially sound and in a strong position to recover, say Yong and Sum. “The strong show of support from Temasek, which took up some 95% of the MCBs, boosts SIA’s pro-forma cash balance to approximately $14 billion, providing it with a firm buffer to navigate through the current crisis and fund the capital expenditure for its fleet renewal program.”

That said, the MCBs could also be highly dilutive, regardless if they are eventually redeemed or converted. A total of $9.7 billion of MCBs are now in issue, with a yield to call of 4% in the first four years and up to 6% in years eight to 10, meaning that the MCBs are highly dilutive whether they are redeemed or converted. “We believe SIA would look to redeem most, if not all, of these MCBs as soon as demand recovers and stabilises,” write Yong and Sum. 

Meanwhile, CGS-CIMB analyst Raymond Yap is maintaining his “add” call on the airline, with a lowered target price of $5.54 from $5.64 previously. The new target price represents a 7.0% upside. 

“We expect international travel to resume gradually from late-2021F before becoming more meaningful by mid-2022F,” writes Yap in a July 30 note.

SIA said it had already deployed 28% of its pre-Covid-19 passenger available seat kilometres (ASK) capacity as at June 30, and forecasts its passenger ASK capacity to rise to 50% by Sept 30. The restoration of ASK capacity is net positive for the group, as it will be able to generate more freight income from the passenger planes’ bellyhold cargo capacity.

SIA noted that cargo demand and yields remain robust due to the shortfall in airfreight capacity as international air passenger networks have not been significantly restored. Even though passenger load factors will likely remain low, SIA said previously that it expects to be able to recover the variable costs from the flights from cargo revenues, among others. 

Higher oil prices are not likely to be of consequence to SIA in the next few quarters, writes Yap, as it had committed to a large hedge book pre-Covid-19 and is likely to be almost fully hedged for its currently small volume of fuel consumed.

SIA’s debt-to-equity ratio stood at a manageable 0.67 times as at June 30, with gross cash balance of $13.7 billion almost as much as its gross debt balance of $15.1 billion. SIA has access to $2.1 billion of undrawn credit lines and additional headroom of $6 billion for sale and leaseback transactions of various aircraft. “As such, SIA is well positioned to be a competitive winner in the post-pandemic world,” says Yap. 

As at 3.24pm, shares in SIA are trading flat at $5.18.