Risk-reward now in balance: Hold downgrade
? FY3/22F core net loss of S$1.1bn was in line with our/consensus forecasts.
? While we raise our FY23-24F core EPS forecasts, we downgrade from Add to
Hold as SIA’s share price has already rerated 60% from its 2020 lows.
? Our TP is tweaked higher to S$5.92, using FY23F P/BV of 0.98x (+0.5 s.d.
from the mean since 2011) vs. 1.06x previously (+1 s.d.).
Cargo profits drove the narrowing of SIA’s core net loss in FY22
SIA reported a core net loss of S$268m in 2HFY22, w hich is 44% narrow er yoy and 69%
narrow er hoh, due to stronger cargo profits and low er share of associate losses, partly
offset by low er deferred tax credits. Within 2HFY22, SIA enjoyed a small core net profit of
S$28m in 3QFY22, although this reversed into a core net loss of S$296m in 4 QFY22 (8%
narrow er yoy). The 3Q core net profit w as achieved on the back of extremely strong
cargo profits, w hich benefitted from the seasonal Dec peak, but cargo profits w eakened
qoq into the 4Q due to the Chinese New Year holiday in Feb and the Covid-19 lockdow ns
in China from Mar onw ards. For the w hole FY22, SIA halved its core net loss to S$1.1bn,
contributed entirely by a doubling of cargo profits. By contrast, the pax airline business
remained in losses for the third consecutive year, and w e estimate that the pax airlines’
core operating losses w idened 20% yoy in FY22. While the unfavourable gap betw een
RASK and CASK narrow ed in FY22, it w as ironically the recovery of ASK capacity and
RPK demand that drove up absolute losses in FY22. The pax airlines’ operating losses
probably w idened in 4QFY22 vs. 3QFY22 because of the 8% qoq rise in spot jet fuel
prices and as SIA’s fuel hedging only covered 30% of its 2HFY22 requirements.
Demand prospects for 1QFY23F (Apr-Jun 2022) look good…
Singapore reopened its borders to quarantine-free travel from 1 Apr 2022 and all testing
requirements w ere removed from 26 Apr. This triggered a 49% mom jump in SIA’s RPK
demand in Apr, w ith PLF rising from Mar’s 54.5% to Apr’s 72.7%. Anecdotally, w e believe
that average ticket prices have risen a lot, w ith SIA noting that forw ard sales in Jun-Aug
are “approaching pre-Covid-19 levels”. We lift our SQ PLF assumption in FY23F from
60% to 75% to reflect the robust demand outlook. Separately, cargo volumes may pick
up qoq w ith the upcoming lifting of the Shanghai lockdow n from 1 Jun. Upside risks to our
Hold call include stronger-than-expected yield outcomes for the pax airline business.
… but cost escalation could dampen upside
Conversely, the significant oil price increases pose the largest dow nside risk. SIA is only
40% hedged at an average Brent strike price of US$60/bbl from Apr 2022 to Jun 2023F,
beyond w hich SIA is unhedged. At the time of w riting, Brent crude is trading at
US$113/bbl and Singapore jet fuel at US$133/bbl, w hich are multi-year highs. SIA has
also committed to restoring pilot salaries fully by 31 Dec 2022F and to replacing cabin
crew members that have resigned. Meanw hile, the Singapore government may also
reduce cost support for SIA’s operations sometime this year. At the current share price,
w e think that a Hold call is appropriate as the stock’s risk and rew ard appear balanced.