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Improving outlook largely priced in

  • On track to turn cash flow neutral in 3QFY22
  • More visibility on recovery prospects from easing of travel restrictions globally
  • However, upside limited from hereon given rich valuation
  • Maintain HOLD with unchanged TP of S$4.90
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Investment Thesis:

Fairly Valued as a cashed-up SIA is in a strong position to wait patiently for a recovery. The timeline for a sustained re-opening of international borders to air travel continues to be pushed back with the emergence of new COVID-19 variants but SIA is in a strong position to wait for the eventual recovery. Trading at 1.3x adjusted P/BV, or close to +2 SD of its 10-year mean, we see SIA’s longer-term recovery as largely priced in already.

Issuance of S$6.2bn MCBs ensures SIA remains financially sound and in a strong position to recover… The strong show of support from Temasek, which took up c. 95% of the MCBs, boosted SIA’s pro-forma cash balance to c. S$14bn, providing it with a firm buffer to navigate through the current crisis and fund the capital expenditure for its fleet renewal program.

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.. but the MCBs could also be highly dilutive, regardless if they are eventually redeemed or converted. A total of S$9.7bn of MCBs are now in issue, with a yield to call of 4% in the first 4 years and up to 6% in years 8 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.

Valuation:
Our target price of S$4.90 for SIA is based on 1.2x FY23F P/BV, which is +1 SD above the stock’s ten-year mean P/BV. We treat the MCBs as debt instead of equity as we see SIA redeeming the MCBs within 10 years and include the implied accrued interest at end FY23.

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Where we differ:
Lower than consensus net profit projections as we expect SIA’s passenger volumes to take a longer time to normalise.

Key Risks to Our View:
The key risks on SIA are international borders opening sooner than anticipated, and pent-up travel demand exceeding our expectations.

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