1QFY23: Result Beat Expectations; Exceptionally Strong Profit Expected In FY23
SIA’s 1QFY23 net profit of S$370m came in above expectations at 27% of our full-year forecast. 1QFY23 operating profit of S$556m was the second-highest quarterly profit in SIA’s history. We raise our FY23 net profit forecast from S$1.35b previously to S$1.85b, a level not seen in the past decade. Note that this level of profitability should not be taken as the norm and SIA’s current valuation is stretched. Maintain HOLD with a higher target price of S$5.18, pegged to 1.15x FY23F P/B (2SD above historical mean).
• Results beat expectations. Singapore Airlines’ (SIA) 1QFY23 net profit of S$370m (4QFY22: S$210m loss) came in above expectations, at 27% of our FY23 full-year forecast but 96% of consensus’. The upbeat 1QFY23 earnings performance was mainly attributable to the steeper-than-expected pax volume recovery and strong pax yields, with their positive impact further amplified by SIA’s high operating leverage. SIA also benefited from a favourable fuel hedge gain of S$202m (pre-tax) in 1QFY23. Excluding the fuel hedge gain, SIA’s 1QFY23 net profit was still a positive S$202m, vs the S$303m net loss a quarter ago.
• Revenue rose 58% qoq, driven by the passenger business. Pax flown rose 119.3% qoq to S$2,676m in 1QFY23, driven by a 126.7% qoq growth in pax volume. Pax yield moderated slightly to 11.7 S cents per passenger-km in 1QFY23 (4QFY22: 12.1 S cents), but still at about 25-30% above pre-pandemic levels. Cargo-flown revenue fell 1.5% qoq to S$1,096m on weaker cargo loads (-3.6% qoq) due to lockdowns in China, but cargo yields stayed at an elevated level of 80 S cents per tonne-km (+2.2% qoq), significantly higher than prepandemic levels of 28-33 S cents.
• Improving operating cash surplus and balance sheet strength. Operating cash surplus rose to S$1.48b in 1QFY23 (4QFY22: S$502m). This helped strengthen SIA’s balance sheet. Even with all its Mandatory Convertible Bonds (MCBs) treated as debt, SIA’s net gearing would be near 50% as at end-1QFY23 by our estimate, down from 63% a quarter ago.
• Upbeat pax capacity recovery. According to SIA, the group’s pax capacity is projected to increase to around 68% of pre-pandemic levels in 2QFY23 (1QFY23: 61%) and 76% by 3QFY23. In an earlier press release, the company guided to restore pax capacity to 81% by Dec 22, with a plan to expand/restore its Japan and India networks as well as to increase flight frequencies to Los Angeles and Paris.
• Pax load factor already at pre-pandemic levels. Driven by the strong air travel demand, pax load factor has recovered to pre-pandemic levels, standing at 85.5% in Jun 22. We expect the pax load factor to stay upbeat through end-22, given that the next two quarters are seasonally strong (with holiday travel periods).
• Healthy forward sales indicating buoyant pax yields. According to management, SIA’s forward sales today is very close to pre-pandemic levels. Based on the forward sales, pax yields are holding up till the end of 2022. Management noted that the company has not seen aggressive price competition at this juncture as all airlines are focusing on their own profitability recovery amid the current high level of fuel prices and inflationary pressure.
• Cargo yields staying elevated in the near to medium term. Management believes cargo yields are likely to stay higher than pre-pandemic levels in the near- to medium-term as air cargo capacity remains tight on key trade lines, particularly between Europe and Asia, amid the Russia-Ukraine conflict. This would support the profitability of SIA’s cargo business in the near- to medium-term.
• Strong near-term earnings momentum driving FY23 profitability to a record level not seen in the past decade… We believe all the above factors are paving the way for SIA’s strong earnings momentum in the next two quarters. Our updated net profit projection of S$1.85b (previous: S$1.35b) is a record level not seen by SIA in the past decade. FY23 net profit includes a substantial fuel hedge gain of S$910m (pre-tax) by our estimate, due to its favourable fuel hedge position (SIA hedged 40% of its projected fuel consumption till Jun 23/1QFY24 at Brent crude oil price of US$60/bbl, vs the current Brent spot price of
• …but this level of profitability should not be taken as the norm. After the exceptionally strong FY23, we expect SIA’s profitability to trend downwards in FY24-25, as: a) its currently favourable fuel hedge position ends in 1Q24, b) competition (other airlines adding/restoring capacity) drives pax yields down to more normalised levels, and c) cargo yields would also gradually return to normalised levels as the supply chain issue gets resolved. Air travel recovery is also likely to slow down beyond FY23 if China does not open up or opens up at a very slow pace. We expect SIA’s net profit to see two consecutive years of decline in FY24 (- 26% yoy) and FY25 (-30% yoy), before stablising at a more normalised level of net profit of S$963m in FY25.
• Key risks: a) air traffic recovery losing steam, b) a possible recession impacting air travel demand, and c) increasing competition from competitors adding capacities.
• Valuation is stretched; maintain HOLD. Our new target price of S$5.18 is based on 1.15x FY23 P/B, which is 2.0SD above SIA’s historical average of 0.97x in the pre-pandemic years. SIA’s current price of S$5.45 implies a 1.21x FY23 P/B or 2.7SD above historical average. Sentiment on SIA may remain strong in the next 1-2 quarters on strong earnings momentum and we recommend investors to offload SIA into share price strength.
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• Positive news flow on Northeast Asian countries’ opening-up (including possible shifts in China’s stance in treating COVID-19).