F1 and MICE events to spur travel demand
- Upgrade from Hold to Add with a higher TP of S$6.10 (mean FY23F P/BV of 0.95x) as we become more confident about the strong demand outlook.
- We raise our FY23-25F core EPS forecasts by 55-66% on stronger load factor and yield assumptions.
Strong capacity restoration and muted competition
We expect SIA to do very well in the coming quarters, due to the combination of rising capacity restoration, strong demand, high load factors and robust yields. The SIA group’s ASK capacity rose from 4QFY3/22’s 52% of the pre-pandemic base to 1QFY23’s 66% and we forecast further recovery to 73% in 2QFY23F and to 79% in 3QFY23F. For FY23F as a whole, we think that the SIA group should be able to restore 74% of its preCovid-19 capacity, rising to at least 95% in FY24F or higher if China reopens its borders sooner. Competition has also been relatively muted so far, with airlines in Southeast Asia gradually ramping up capacity deployment and certain key competitors such as Cathay Pacific and the mainland Chinese airlines still held back by Hong Kong’s border controls.
Demand to be boosted by F1 race and MICE events
On the demand side, SIA expects the strong demand in 1QFY23 (Apr-Jun 2022) to continue until Dec 2022F, based on the robust forward booking curve. In our view, the strong demand was on account of a powerful mix of pent-up travel demand, lags in competitors’ capacity restoration (due to operational bottlenecks at individual airlines), and North Asian governments’ continued closure of their borders which handed SIA greater market share of transfer traffic through Changi at the expense of say, Hong Kong. In 1QFY23, SIA group achieved a passenger load factor (PLF) of 79%, with Jun 2022 PLF at 85.5%. The strength in demand continued into Jul 2022 with PLF at 87.4%, which is the second-highest PLF in SIA’s history. In light of this, our previous FY23F PLF assumption of 79% appears too conservative, and we now raise it to 83%, while we also raise PLF assumptions for FY24-25F from 79-80% previously to 82%. Anecdotally, Singapore is seeing strong inflows of foreign professionals, while the F1 race event scheduled for 30 Sep to 2 Oct this year could draw as many as 35k tourists (see page 8 of our 19 Aug note), with hotel room rates already spiking. Separately, the line-up of MICE events in 2H22F could further boost inbound travel into Singapore; these include major international events, such as Food and Hotel Asia – Food & Beverage 5-8 Sep) and Food and Hotel Asia (25-28 Oct), with each expected by the Singapore Tourism Board to attract more than 30,000 physical attendees.
Both passenger and cargo yields may remain elevated for now
Strong demand is likely to sustain average passenger yields at historically-high levels in FY23F, albeit still lower than in FY22 due to the small traffic base in the comparative year. Cargo yields are also likely to remain elevated, especially between Europe and NE Asia, due to the avoidance of Russian airspace. Key downside risks include the potential for oil prices to surprise on the upside in the event of negative geopolitical developments, and more competition as and when other airlines are able to redeploy more of their fleet.