Huge 2QFY23 profit; 3Q to be even bigger?
- 1HFY23 (Apr-Sep 2022) core net profit was in line at 48% of our full-year forecast; the half-year PATAMI made up 82% of consensus FY23F estimate.
- Reiterate Add as we expect demand over the next six months to remain robust while consensus will likely have to upgrade its forecasts significantly.
- We lower our TP to S$5.97 (CY24F P/BV of 0.9x, mean) but with a new FY23F DPS of 32 Scts (previously none), which raises total return to 18%.
2QFY23 was one of SIA’s most profitable quarters
SIA’s 2QFY23 core net profit widened to S$493m, from S$322m profit in 1QFY23, due to 1) a significant qoq increase in SQ’s EBIT (this was SQ’s second consecutive quarterly profit since Covid-19); while 2) TR became profitable for the first time in 17 quarters, but partially offset by 3) a qoq decline in cargo profits due to the summer lull, global slowdown in consumer buying as a consequence of inflation, and more competition as other airlines reinstate their networks. SQ contributed S$301m of SIA’s S$678m EBIT in 2QFY23, with cargo contributing S$383m, and TR a much smaller S$12m. SIA’s 1HFY23 core net profit of S$814m was a substantial turnaround from the S$261m loss in 2HFY22. SIA declared a 10 Scts DPS, the first in more than two years, suggesting confidence in its forward outlook; we now pencil in a dividend payout ratio of c.50% for FY23-25F (zero payout previously), with our FY23F forecast DPS of 32 Scts providing a yield of 6%.
SIA may have pre-sold half of the next six months’ seat capacity
Despite the weaker air freight market, the focus in 1HFY23 was clearly the sharp rise in passenger demand; SQ saw RPK demand, PLF and yields all rise qoq in 2QFY23, though TR allowed its yields to fall 6% qoq to drive up demand and loads qoq. SIA generated an operating cash surplus of S$2.5bn for 1HFY23 (excluding forward sales) vs. the prepandemic 1HFY20 op. cash surplus of S$1.45bn (Apr-Sep 2019), which reflects the fact that despite the 31% lower ASK capacity in 1HFY23 vs. 1HFY20, SIA generated roughly the same turnover due to the 30% yield improvement. The outlook for SQ and TR for the rest of 2HFY23F looks very strong, with SIA saying that forward sales will likely remain “buoyant in the coming months leading up to the Lunar New Year period”. As evidence, we highlight that forward sales ballooned to S$4.2bn as at 30 Sep 2022 (vs. S$2.1bn as at 31 Mar 2022), or half of the 1HFY23 revenue base and larger than the S$3bn forward sales as at 30 Sep 2019, with the latter ‘just’ 36% of the 1HFY20 revenue base. The reopening of Taiwan, Hong Kong and Japan in Sep/Oct is also in time for the year-end travel peak.
Key risk lies in weakening cargo markets
Because of SIA’s substantial gross cash balance of S$17.5bn as at 30 Sep 2022, on 8 Dec 2022 SIA will redeem S$3.5bn of its S$9.7bn MCBs; we expect SIA to redeem a further S$1.35bn in the next 12 months to take the total redemption to half of the MCBs. The key downside risk is the potential for weaker cargo profits in 2HFY23F; SIA guides for a muted peak season and we also project weaker cargo yields due to rising competition from other airlines and because container freight rates have collapsed.
