Upgrade to Add after Omicron sell-off

■ Upgrade SIA from Hold to Add, as the stock has fallen 8% since last Friday when news of the Omicron variant broke (-13% from mid-Oct high of S$5.55).
■ Our TP is tweaked higher to S$5.86 after raising FY23-24F EPS forecasts, still based on P/BV of 1.06x (+1 s.d.), against our adjusted FY23F BVPS.
■ Re-rating catalysts include the rapid expansion of VTL schemes and strong year-end airfreight markets, which should see SIA deliver a strong 3QFY22F.

Ongoing rapid expansion of VTL schemes this quarter …

Singapore has moved to reopen its borders via the Vaccinated Travel Lane (VTL) arrangements with multiple countries that do not require quarantine on arrival. Singapore has been open to inbound travel from China, Hong Kong, Macau and Taiwan for many months, but these have been unilateral in nature, whereas the VTL arrangements are mostly bilateral in nature. The VTLs started from 8 Sep 2021 for arrivals from Germany and Brunei; it was expanded to US, Canada, Denmark, France, Italy, Netherlands, Spain, and the UK from 19 Oct; to Australia and Switzerland from 8 Nov; to South Korea from 15 Nov; to India, Malaysia, Indonesia, Finland and Sweden from 29 Nov; to Thailand from 14 Dec; and to Cambodia, Fiji, Maldives, Sri Lanka and Turkey from 16 Dec. Demand for VTL flights has been very strong, according to SIA, and the SIA group forecasted its Available Seat Kilometre (ASK) passenger capacity to rise from 33% of its pre-Covid-19 level in Aug 2021 to 43% of the pre-pandemic level by 31 Dec 2021F. For the whole financial year of FY3/22F, we forecast the SIA group to deploy 36% of its pre-Covid-19 ASK capacity, rising to 74% for FY23F. The countries to which these VTLs were launched accounted for some 60% of total daily arrivals at Changi Airport pre-Covid-19, according to the Civil Aviation Authority of Singapore (CAAS). However, Singapore’s VTL quota of 15,000 daily passengers only amounted to about one-third of the total pre-Covid- 19 flows from these countries. The quota should be increased with time.

… temporarily paused on Omicron variant; symptoms not severe

The downside risk to our Add call is that the path to the further reopening may be slowed down by the detection of the Omicron variant of the Covid-19 virus. From 27 Nov, visitors with travel history within the last 14 days to Botswana, Eswatini, Lesotho, Mozambique, Namibia, South Africa and Zimbabwe are not allowed to enter or transit in Singapore. On 27 Nov, Australia announced that all vaccinated travellers arriving in the New South Wales and Victoria states from abroad must self-isolate for at least 72 hours. On 28 Nov, Singapore’s Ministry of Health (MOH) announced that the VTLs with Saudi Arabia, Qatar and the UAE, which were supposed to kick-off from 6 Dec, will be deferred. From 30 Nov, Japan barred all new foreign arrivals, while from 1 Dec, India requires travellers from several countries, including Singapore, to quarantine for seven days upon arrival. Nevertheless, there is hope. On 28 Nov, Reuters quoted a South African doctor as saying that Omicron symptoms are very mild, limited to fever, fatigue, body aches and
headaches, with no significant drop in oxygen levels (unlike the Delta variant). If so, nations may resume progressive reopening sooner rather than later.