Multiple risks cloud strong revenue trend
? We reiterate our Hold call on SIA, as the rewards of high airfares, elevated
market share and strong demand are balanced by the risks of high oil prices.
? Our TP is reduced to S$5.75, after cutting FY23-34F EPS forecasts for higher
oil prices and applying a lower FY23F P/BV of 0.95x (mean since 2011).
? We previously used a higher P/BV multiple of 0.98x (+0.5 s.d.) but now adopt
a lower multiple as inflation may hurt discretionary travel demand in future.
Revenue momentum looks solid…
SIA is in a very strong revenue position as it had kept virtually all its pilots over the duration
of the pandemic and is now able to roll out flights quickly. In Apr-Jun 2022F, SIA expects
to have 98% of its air crew active, which is likely far ahead of its Asia-Pacific competitors
which were constrained in different ways and are now restoring capacity more gradually
than SIA. Hence, SIA’s current capacity market share rose in five of six major route regions
vs. 2019, allowing it to capture the strong demand recovery since Singapore opened its
borders from 1 Apr and removed pre-departure testing from 26 Apr. There is also anecdotal
evidence of high airfares, which we believe will hold through the Jun school holidays in
Singapore, as well as over the course of summer in Jul and Aug. As at 13 May 2022, SIA’s
3-month forward booking profile now covers 48% of available seat capacity, just 5% pts
lower than for 13 May 2019. Just three months earlier, the negative gap was wider at 19%
pts. Business travel has also recovered together with leisure travel and driving demand for
premium cabins, beating back earlier fears of online meetings permanently reducing
business travel demand.
…but high jet fuel costs and cost-of-living inflation are concerns
High rates of global inflation, from higher food and fuel prices, and higher global interest
rates are eating into consumers’ spending power, and overseas discretionary leisure travel
could suffer in the future. A global recession in the future is a rising possibility, and if
consumer spending falls, air cargo demand may also decline. As SIA’s competitors ramp
up their capacity deployment in the future, SIA’s heightened market share could fall back
down to 2019 averages. This may cause the current high airfares to moderate, even if jet
fuel price levels remain elevated. While SIA is 40% hedged at Brent price of US$60/bbl
until Jun 2023, Brent is already at US$125/bbl and SIA is exposed to the jet fuel crack
spread, which has widened from US$2/bbl a year ago to US$38/bbl now.
SIA may redeem half of its MCBs in 2-3 years’ time, in our view
Our analysis suggests that SIA may be keen to redeem half of its S$9.7bn MCBs within
the next 2-3 years, before their yields rise from 4% to 5% p.a., as it is holding too much
cash, in our view, with a net debt position of only 8.5% as at 31 Mar 2022 vs. 32% as at 31
Dec 2020 (prior to the pandemic). Redeeming part of the MCBs will reduce SIA’s
shareholders’ equity and make SIA’s P/BV valuations look more expensive, which is
another downside risk factor for investors to consider. Upside risks: strong business and
leisure travel demand in 4QCY22F; unexpected moderation in oil prices.