NET INCOME BACK TO BLACK
- 1QFY23 net profit reversed from a loss to SGD370.4m
- Overall capacity restored to 66.7% of pre-pandemic levels
- Forward sales remained strong up to Oct 2022
Investment thesis
Singapore Airlines’ (SIA) reported strong 1QFY23 (financial year ending Mar 2024) recovery, driven by better operating performance and an absence of noncash impairment charges. SIA’s 1QFY23 revenue tripled year-on-year (YoY) or 58.2% quarter-on-quarter (QoQ) to SGD3.9b while net income turned into a profit of SGD370.4m. SIA’s full-service carrier turned from an operating loss of SGD152.6m in the same quarter last year to a profit of SGD624.3m in 1QFY23, driven by improvement in traffic and capacity. Scoot, which is SIA’s low-cost carrier, remained in an operating loss of SGD51.9m but narrowed by SGD82.6m QoQ as recovery in Southeast Asia was catching up. SIA expects demand to remain strong with forward sales staying buoyant for the next three months up to Oct 2022. We revise our estimates to reflect a stronger recovery and hence increase our fair value estimate from SGD5.57 to SGD5.84. While we expect a continued recovery in air travel in FY23, we believe a large proportion of the positive outlook has been priced in and we see downside risks as competitors ramping up capacity which could weigh on SIA’s yields, together with a potential slow down in cargo demand and recessionary risk in 2023.
Investment summary
• Strong 1QFY23 performance boosted by robust air travel demand – SIA’s 1QFY23 revenue tripled YoY or 58.2% QoQ to SGD3.9b, supported by strong travel demand following Singapore’s full openings since Apr Passenger flown revenue jumped 119.3% QoQ to SGD2.7b, boosted by a 126.7% QoQ growth in traffic. On the other hand, cargo flown revenue fell marginally by 1.5% QoQ to SGD1.1b, impacted by the lockdowns in China. Operating expenditure was more than doubled YoY to SGD3.4b as both net fuel cost (>tripled YoY due to higher fuel prices and flight activities) and non-fuel expenditure (+62.5% YoY)
increased. Consequently, operating income and net income turned into profit of SGD556.4m and
SGD370.4m respectively, above our expectations.
• SIA plans to reinstate 68% of pre-Covid passenger capacity in 2QFY23 – SIA’s full-service carrier turned from an operating loss of SGD152.6m in the same quarter last year to a profit of SGD624.3m in 1QFY23 (~ up sevenfold QoQ), driven by improvement in traffic and capacity. Scoot, which is SIA’s low-cost carrier, remained in an operating loss of SGD51.9m but narrowed by SGD82.6m QoQ as capacity
recovery for Scoot’s key markets such as Southeast Asia was catching up. As of 1QFY23, SIA’s overall
capacity increased by 18.5% QoQ to 66.7% of its prepandemic levels (Passenger: 60.7%; Cargo: 77.0%).
SIA plans to reinstate 68% of pre-Covid passenger capacity in 2QFY23 and 76% by 3QFY23.
• Positive outlook largely priced in – SIA expects demand to remain strong with forward sales staying
buoyant for the next three months up to Oct 2022. We revise our estimates to reflect a stronger recovery and increase our fair value estimate from SGD5.57 to SGD5.84. While we expect a continued recovery in air travel in FY23, we believe a large proportion of the positive outlook has been priced in, with forward
price-to-book ratio trading at 1.2x (~1.5 standard deviation above historical mean). We see downside
risks as competitors ramping up capacity which could weigh on SIA’s yields, together with a potential slow down in cargo demand and recessionary risk in 2023.
ESG Updates
• According to research, Singapore Airlines (SIA) scores better than its global peers in terms of social issues due to its robust compensation practices, higher customer satisfaction and on-time performance metrics. However, SIA’s governance and environment scores rank below the industry average. As a state-owned firm, minority shareholders of SIA may face risks of their interests being subsumed by those of the Singapore government. While SIA operates a relatively young fleet, and has reduced its carbon emission intensity by an average of 12% per year, its emission intensity still exceeds the industry average. However, SIA appears to have stepped up its environmental efforts to achieve net zero carbon emissions by 2050, with continued investment in new generation aircraft, adoption of low-carbon technology such as sustainable aviation fuels and carbon offsetting.
