1QFY23 smashed expectations; raise FY23/24F earnings projections significantly
- SIA returned into the black again in 1QFY23 with a net profit of S$370.4m, a solid sequential improvement from net losses of S$209.9m in 4QFY22. 1QFY23 net profit accounted for 71.7%/56.5% of consensus/DBS’s full-year estimate.
- Passenger revenue skyrocketed by 119.6% q-o-q and 743.0% y-o-y to S$2,674.1m on the back of solid passenger yields, increase in capacity and robust passenger load factors.
- Cargo revenue dipped on q-o-q basis to S$1,096.m (-1.5% q-o-q, +25.2% y-o-y) as a slight improvement in cargo yields tempered softer cargo volumes.
- Operating profit of S$556.4m in the quarter was the second highest in SIA’s history; the group recorded an operating cash surplus of S$1,480m in the first quarter.
- Group capacity is projected to hit 68% and 76% of pre-pandemic levels in 2QFY23 and 3QFY23 respectively, up from 61% in 1QFY23. Management does not foresee any impediments from airport congestions in Europe and North America as schedules have been discussed with the respective airports and ground handlers. Additionally, SIA has the bandwidth to add more flights if the situation permits.
- Demand for flights to the Greater China market only strengthened slightly following the easing of travel restrictions. Travellers are still avoiding the market given that travel measures in the region are still among the world’s most onerous.
- Forward booking data suggest passenger demand will remain buoyant into the holiday season; passenger yields should at least hold at elevated levels until 3QFY23F.
- Management is still deliberating on capital allocation/deployment as the recovery is still in a nascent stage. The group is still evaluating its options with regards to the redemption of the mandatory convertible bonds and will consider paying out dividends again if profitability can be sustained.
- Corporate travel has rebounded but has not reached pre-COVID19 levels. The management shared that there has been a lack of inventory for corporate travellers over the past few months as this customer profile tend to book their flights late, but most flights were sold out early.
- Fuel hedging ratio falls off after 1QFY24. SIA has hedged about 40% of their projected fuel consumption over 2QFY23 to 1QFY24. However, the management indicated that there are limited hedges in place after 1QFY24.
Earnings revision and recommendation
- Lift FY23/24F net profit estimates by 135.2%/56.3% to S$1,541m and S$1,704m respectively, to factor a swifter turnaround in passenger traffic on higher passenger load factors and yields normalising to pre-COVID19 levels at a slightly slower pace. Earnings growth in FY24F will be constrained by a steep increase in fuel costs given the decline in SIA’s fuel hedging ratio from 2QFY24F.
- Maintain BUY with slightly higher TP of S$6.60. We are switching our valuation methodology from forward P/BV to forward EV/EBITDA given that it is more straightforward to benchmark valuations on an EV/EBITDA basis as it is capital-structure neutral, and SIA’s earnings profile has likely stabilised (SIA’s earnings were highly volatile and depressed during the pandemic) from 1QFY24. Our new TP of S$6.60 is based on 6.5x blended FY23/24F EBITDA (+1 standard deviation above 3-year average prior to the pandemic), as compared to 1.3x FY22/23F blended book value previously.