Excellent 1Q23; all the pieces fall into place
- 1QFY3/23 core net profit of S$322m outperformed expectations as it made up 55% of our previous FY23F estimate and 96% of Bloomberg consensus.
- This was mainly due to higher-than-expected loads and yields at SQ, which benefitted from the surge in demand when Singapore reopened on 1 Apr.
- Reiterate Hold with a higher TP of S$5.89 (at mean FY23F P/BV of 0.95x) as we raise our FY23F core net profit forecast by 84%.
Sharp turnaround to profits in 1QFY3/23 (Apr-Jun 2022 quarter)
SIA’s 1Q23 core net profit of S$322m was a strong turnaround from 4Q22’s core net loss of S$292m as the reopening of Singapore’s borders from 1 Apr 2022 catalysed a doubling of SQ’s RPK demand in 1Q23 from the immediately-preceding 4Q22, with PLF rising from 49% to 82.4%. SIA was in a unique position to capitalise on the strong demand as it had deliberately maintained operational readiness throughout the pandemic and had in fact gained market share across major route regions because its competitors struggled to redeploy their aircraft capacity. In the past few months, there were anecdotal reports of
high ticket prices and this was reflected in the results, with SQ’s 1Q23 yields up 3% qoq; this combined with the surge in PLF helped push RASK up a staggering 73% qoq, far exceeding the 15% rise in unit costs and allowing SQ to report a positive EBIT of S$33m in 1Q23 vs. a loss of S$545m in 4Q22. The qoq rise in unit costs was on account of the 41% qoq rise in spot jet fuel prices from US$93/bbl in 4Q22 to US$131/bbl in 1Q23, although we estimate that SIA’s all-in jet fuel prices averaged lower at US$84/bbl in 4Q22 and US$117/bbl in 1Q23 as it had hedged 40% of its fuel needs at an average Brent price of US$60/bbl. As for TR, while it remained in the red, its EBIT loss narrowed from S$143m in 4Q22 to S$52m in 1Q23 on the back of much stronger demand and loads, partially offset by lower yields. Although the 1Q23 cargo EBIT of S$532m was lower than 4Q22’s S$621m, with demand negatively affected by pandemic controls in China and because of higher jet fuel costs, we are not overly concerned as cargo yields remain high due to reduced AsiaEurope capacity given the avoidance of Russian airspace by North Asian carriers.
Rest of FY23F likely to be very strong; FY24-25F potentially weaker
The SIA group’s ASK capacity rose from 4Q22’s 52% of the pre-pandemic base to 1Q23’s 66% and we forecast further recovery to 73% in 2Q23F and to 79% in 3Q23F, based on SIA’s guidance. These percentages are measured against the equivalent pre-pandemic quarter in CY19. A future reopening of China’s borders will likely fill in the remaining gap, in our view. For now, SIA expects travel demand to be robust through to the year-end holiday period, with forward sales buoyant for the next three months to Oct 2022F. This suggests that SIA’s strong 1Q23 performance will likely be repeated in upcoming quarters as SIA has promised to keep a tight rein on non-fuel operating costs. Upside risks include
a faster-than-expected recovery in cargo and passenger traffic, especially if China reopens. Downside risks include higher oil prices with SIA only 40% hedged until Jun 2023F and stronger competition as other airlines ramp up their capacity restoration; we have modelled this scenario in our FY24-25F forecasts, which reflect lower earnings.
