Singapore Airlines (SIA SP): Ready to conquer the skies again
- Upgrade to BUY with a higher TP of S$6.20
- We now expect SIA’s passenger traffic to normalise by June 24, as compared to December 24 earlier
- In the meantime, passenger and cargo yields should remain high and temper inflationary pressures
- Resilient balance sheet provides SIA financial flexibility and will drive outperformance amid rising interest rates
Investment Thesis:
Recovery in passenger volumes should outpace that of peers in the region. SIA’s international passenger traffic has been recovering at a faster clip than its peers since Singapore launched its first VTL in September 21. We expect this trend to persist and envisage the group’s passenger volumes hitting 70% and 96% by end-FY23/24F, respectively, supported by Singapore’s new Vaccinated Travel Framework and the synchronised reopening of borders in the region.
Favourable supply-demand dynamics to underpin healthy passenger and cargo yields. Colossal pent-up travel demand and the gradual restoration of passenger capacity will support passenger yields. Meanwhile, cargo yields should remain high despite the looming addition of capacity due to prolonged widespread supply chain disruptions.
SIA’s valuation may be above its historical mean, but it is still cheaper than competitors in the region. The airline is currently priced at 1.1x FY23F P/BV, at around +0.5SD above its 10-year mean. We believe that its relatively promising recovery trajectory and medium-term outlook justify a multiple that is on par with its peers.
Valuation:
Our target price of S$6.20 for SIA is based on 1.3x FY23/24F P/BV, which is +1.5SD above the stock’s 10-year mean P/BV. We treat the MCBs as debt instead of equity, as we see SIA redeeming the MCBs within 10 years, and deduct the accrued interest at end-FY23/24F.
Where we differ:
We have street-high earnings estimates, as we expect SIA’s passenger volumes to normalise at a faster rate and higher passenger and cargo yields.
Key Risks to Our View:
The key risks to our view are: 1) repeated COVID-19 episodes impeding the recovery in air travel, and 2) passenger and cargo yields moderate to pre-pandemic levels prior to our expectations.