Prospects brighten with VTL schemes

  • 2QFY3/22 core net loss of S$399m was in-line but we widen our FY22F loss forecast on slower-than-expected capacity restoration and higher fuel costs.
  • Reiterate Hold as the stock has reflected most of the upside from borders reopening, in our view, and we now turn our attention to downside risks.
  • Our TP is raised slightly to S$5.81, rolling forward to end-FY23F, still based on P/BV of 1.06x, 1 s.d. above mean, against our adjusted BVPS.

Decent qoq progress in 2QFY3/22 (Jul-Sep 2021)

On a qoq basis, SIA’s 2QFY22 core net loss of S$399m was lower than the immediately preceding 1Q’s S$430m loss due to the stronger cargo profits and likely higher deferred tax credits, which more than offset wider EBIT losses at the pax airlines and lower total fuel derivative gains. SIA Cargo saw robust demand, higher yields and lower unit costs as its capacity grew from more bellyhold capacity on pax flights. The qoq widening of pax airline EBIT losses was partly due to higher spot jet fuel prices but mainly due to the upfront costs needed to restart long-haul flights, which also carry lower yields than short haul flights. In 1HFY22, SIA’s S$829m core net loss was 72% more than 2HFY21’s S$481m loss, with 75% of variance from lower deferred tax credits, 17% from higher associate losses and 14% from higher interest expense; these masked a lower hoh group EBIT loss. SIA’s ‘operating cash deficit’ of S$106m in 1HFY22 (Apr-Sep 2021: S$18m/mth) narrowed from 2HFY21’s S$645m deficit (Oct 2020-Mar 2021: S$108m/mth) and 1HFY21’s deficit of S$1,726m (Apr-Sep 2020: S$288m/mth); this is computed as operating cashflows excluding forward sales minus lease liability instalments.

Core losses should narrow further in Oct-Dec 2021F

SIA guided that the year-end peak for cargo is looking very strong, which may help further narrow the 3QFY22F losses qoq. Furthermore, the Vaccinated Travel Lane (VTL) schemes will likely make a bigger contribution given that the Germany VTL started on 8 Sep and the VTLs with the UK, US, Italy, France, Netherlands, etc. started on 19 Oct. The South Korea VTL will start on 15 Nov while the VTL with Malaysia will start on 29 Nov. Meanwhile, Australia, which is a very important market for SIA, permitted its residents overseas travel from 1 Nov and will reopen to vaccinated Singaporean travellers from 21 Nov. Also, the A380 services to London and Sydney and the Manchester-Houston flights will resume in the next few weeks to cater to demand.


Future fuel cost volatility to increase due to reduced hedge cover

We previously estimated that SIA had 100% fuel hedge cover for FY22F, 73% for FY23F, and 60% for FY24F, based on legacy contracts. However, SIA disclosed that it had opportunistically exited a large portion of its hedges in the past six months, cutting fuel hedge cover for 2HFY22F to only 30% (at Brent strike of US$57/bbl) and to 40% from 1QFY23F to 1QFY24F (at US$60/bbl strike), beyond which there are no further hedges. Derivative profits of US$24m will be booked in 2HFY22F and US$208m beyond that. The lower hedge cover is a surprise development that may increase SIA’s fuel cost risk.