A Potentially Steeper-than-expected Recovery Trajectory
Mar 22 air traffic data at Changi Airport and operating data of Singapore Airlines beat
our forecasts, even before the positive impacts from the border measure relaxations
kicked in. Singapore’s scraping of pre-departure test requirements for fullyvaccinated air travellers entering Singapore would further support a sector recovery.
Maintain MARKET WEIGHT on the sector. Maintain BUY on SIA Engineering (new TP:
S$2.90) and SATS (new TP: S$4.85) and HOLD on SIA (new TP: S$4.85).
WHAT’S NEW
• Strong March air traffic statistics. Mar 22 air traffic statistics at Changi Airport and
operating data of Singapore Airlines (SIA) came in stronger than we have expected. While
the paces of recovery in the flight activities and the passenger capacity reactivation were
broadly in line, surprise mainly came from the passenger volume. Changi airport
passenger volume rose 62.2% mom to 1,140,000 in Mar 22, which stood 19.2% of the
pre-COVID-19 (Jan 20) level. National carrier SIA saw its passenger load rising 61.2%
mom in Mar 22, on the back of a 15.7% mom increase in passenger capacity (ASK) and a
significant 15.4%pt mom improvement in passenger load factor.
• The substantial improvement in Mar 22 operating statistics has been achieved even
before the anticipated positive impacts of Singapore’s recent round of border measure
relaxations (effective from Apr 22 onwards) kicked in. This is a sign that reaffirms the
strong pend-up demand of air travel and points to a potentially steeper-than-expected
recovery trajectory for the Singapore aviation sector.
• Further easing of border measures. Since 1 April, Singapore has scrapped the previous
quota-based Vaccinated Travel Lane (VTL) arrangement and replaced it with a new
Vaccinated Travel Framework (VTF) which allows fully-vaccinated travellers to enter
Singapore free of quarantine and on-arrival tests. Last Friday (22 April), Singapore
announced the further relaxation of its COVID-19 measures. From 26 April onwards, predeparture tests are no longer required for fully-vaccinated travellers and children aged 12
and below to enter Singapore. This will further ease entry process into Singapore.
• Positive guidance. According to a press release by Civil Aviation Authority of Singapore
(CAAS) on 18 April, air passenger traffic in Singapore has reached 31% of the preCOVID-19 levels in the week ending 17 April; this is compared with 19.2% for the whole
month of March by our estimate. CAAS also guided that Singapore is on track to achieve
its goal to restore over 50% of pre-COVID-19 air travel passenger volume in 2022. In its
most recent update, SIA guided that it would raise its passenger capacity to 61% of the
pre-COVID-19 levels by May 22, compared with 51% in Mar 22.
ACTION
• Raising FY22-24 financial forecasts for the three Singapore Aviation plays. Given
the strong showing of Mar 22 operating statistics of Changi Airport and SIA and
considering the further easing of travel restrictions effective from Apr 22, we have raised
our FY22-24 net profit forecasts for SIA, SATS and SIA Engineering Company (SIAEC)
upward (figure below), to reflect a potential steeper recovery trajectory.
• Still looking at 2024 (FY25) for the full sector recovery. Despite the raised FY22-24
earnings projection for the three aviation plays, our forecasts beyond FY25 are lightly
touched as the stronger-than-expected recovery in the near horizon does not
necessarily lead to higher longer-term earnings potential. We are still looking at FY25
as the year for the sector to see a full recovery, as some major markets in Northeast
Asia (particularly China) are expected to lag behind in the trend of global opening-up.
• Maintain BUY on SATS and SIAEC, HOLD on SIA with higher target prices. We
have retained our recommendations on SATS, SIAEC and SIA, with target prices
uplifted by 4.3%, 3.6% and 1.0% respectively.
• SIAEC and SATS are our preferred proxies to ride the sector recovery. SIAEC
and SATS are trading at 15.9x and 18.7x FY25F (normalised year) PE, standing at
1.9SD and 0.4SD below their FY14-19 (pre-COVID-19 years) average PE of 23.2x and
19.9x, respectively.
• MCBs, SIA’s legacy baggage from COVID-19. Despite possible positive earnings
surprise for SIA, we maintain our case that the significant and potentially highly dilutive
mandatory convertible bonds (MCB) have to be redeemed first, before SIA’s earnings
recovery can deliver more meaningful valuation accretion to its common shareholders.
Refer to our SIA re-initiation report dated 28 Mar 22 for more detailed discussion on the
MCBs. SIA is currently trading at 1.47x FY23F P/B, an unprecedentedly high level or
4.0SD above its historical average P/B of 0.79x
SECTOR CATALYSTS
• Key sector catalysts include positive news flow of Singapore air travel recovery and
possible shifts in stance in treating COVD-19 by Northeast Asian countries (particularly
China).
RISKS
• Slower-than-expected earnings recovery; a more infectious/fatal COVID-19 variant
leading to rollback of the global economic reopening.