Share price weakness – chance to Add?
? 9MFY22 core net loss of S$837m made up 65% of our full-year loss forecast, above expectations due to stronger-than-expected cargo profits.
? Strong oil prices have dampened investor enthusiasm for SIA, but oil price strength may be transitory, and borders may reopen convincingly by mid-22F.
? Reiterate Add with a slightly higher TP of S$5.88, still based on FY23F P/BV of 1.06x (+1 s.d. from the mean since 2011) on our adjusted BVPS.
First positive quarterly core net profit since the pandemic began…
SIA delivered a core net profit of S$28m in 3QFY22 (Oct-Dec 2021), which is a large S$463m positive swing from the S$435m core net loss in the immediately-preceding 2QFY22. The cargo business was the largest contributor to this qoq improvement, as it delivered a S$282m qoq rise in EBIT, from S$522m in 2QFY22 to S$804m in 3QFY22. Meanwhile, the passenger airline business saw a positive swing of S$140m qoq from S$761m EBIT loss in 2QFY22 to S$621m EBIT loss in 3QFY22. SIA’s 3QFY22 core net profit of S$28m was much better than our initial estimate of a S$300m loss, as the cargo arm outperformed expectations on the back of stronger demand, higher yields and lower unit costs on a yoy and qoq basis. The cargo strength was on account of the year-end spike in airfreight demand, as well as the container shipping congestion which forced cargo owners to move goods via airfreight instead. On the passenger airline side, SQ benefitted the most from the introduction of the Vaccinated Travel Lanes (VTL) from Sep
2021 onwards, which were enthusiastically embraced by passengers despite higher average ticket prices; this allowed SQ to reduce its EBIT losses qoq. The low-cost carrier Scoot did not benefit as much as it had fewer VTL flights.
…although 4QFY22F may fall back into the red
We expect SIA to report core net losses once more in 4QFY22F, as we are past the year end travel peak season and cargo demand weakened over the Lunar New Year in Feb. The Singapore government also suspended new ticket sales for VTL flights from 23 Dec 2021 to 20 Jan 2022, and halved the VTL daily quota from 21 Jan 2022 onwards although it will fully restore the quota between 17 Feb and 4 Mar 2022. Furthermore, spot jet fuel prices have surged to US$111/bbl, from just US$85/bbl three months back, with
SIA hedged for just 30% of its needs in the current quarter.
Prospects for FY23F continue to brighten, barring high oil prices
We are optimistic on SIA’s prospects as we look further ahead into FY23F. The Singapore government has committed to restoring the full VTL quota of 15,000 arriving passengers daily from 4 Mar 2022 onwards, has already simplified Covid-19 testing protocols to reduce the cost of travel into Singapore, and will eventually expand the VTL scheme to all vaccinated travellers from around the world. We think that this may happen by mid-CY22F once the Omicron wave subsides. The key downside risk is higher oil prices as SIA is only hedged for 40% of its consumption in FY23F.