Enumerating downside risks to SIA
- SIA hosted its post-1HFY3/23 results briefing yesterday. We reiterate Add as we expect SIA’s profits to remain elevated in the next two quarters.
- Downside risks could become more apparent next year as cargo markets weaken and competition pressures passenger yields.
- We suggest investors trim positions in the stock when China’s border reopening is announced. Our TP is based on CY23F P/BV of 0.9x (mean).
Downside risks from passenger competition and cargo weakness
? SIA guided that the current forward-booking profile was very strong across both leisure and business travel, with visibility stretching to the Lunar New Year period in late-Jan 2023. Business travel picked up strongly in 2QFY23 (Jul-Sep 2022), even though it had lagged the leisure travel recovery in 1QFY23 (Apr-Jun 2022).
? Analysts and media attending the briefing were eager to hear SIA’s view on the outlook for demand and yields after the Lunar New Year. SIA did not provide any forward guidance, but said that as competitors reinstated capacity, it is natural to expect yields to moderate from the exceptional situation in FY23F which saw SIA catering effectively to a surge in demand while its competitors struggled to reactivate their idled airplanes. The uncertainty over rising interest rates, inflation, and potential recession next year is also clouding the demand outlook. We share this view and have forecast weaker FY24- 25F earnings; however, these factors remain downside risks for SIA. In order to build a base of forward bookings, SIA is offering promotional fares across its network for travel in early-CY23; this could be a sign that SIA is taking preemptive action to lock in demand before other competitors ramp up capacity that may pressure fares lower.
? Another wild card is how quickly the cargo markets will weaken. Cargo yields weakened 5.75% qoq in 2QFY23, with demand down 3% qoq, but as we head into the traditional year-end peak in 3QFY23F (Oct-Dec 2022), how will demand and yields fare qoq? We suspect that demand will at best remain stable qoq, but yields will almost surely decline, due to the reinstatement of competitors’ air freight capacities, the collapse of container shipping freight rates, and the slowdown in consumer demand in the US and Europe.
Dividends could provide some downside support
? SIA declared 10 Scts interim DPS in its 1HFY23 results announcement, and we have pencilled in a c.50% payout ratio in our FY23-25F forecasts. In 1HFY20 (Apr-Sep 2019), SIA paid out 46% of its reported net profit as dividends. In FY19, the last full year before the onset of the Covid-19 pandemic, SIA’s payout ratio was 52%; FY18: 36%; FY17: 66%; FY16: 65%; FY15: 70%. We think our 50% payout assumption is reasonable, but SIA did not comment on its dividend policy at yesterday’s results briefing.
? As announced earlier, SIA will redeem the entire S$3.5bn of its first tranche of Mandatory Convertible Bonds on 8 Dec 2022; SIA said that it will take its time to decide on the redemption, in whole or in part, of the second tranche of S$6.2bn. SIA is not in a rush as borrowing costs have risen above 5%, making the 4% p.a. MCBs attractive.
? We expect SIA’s share price to find support from likely outstanding results for 2HFY23F, but recommend investors to lighten up once China announces the reopening of its borders based on a ‘sell on fact’ strategy, as the exceptional FY23F performance is not likely be repeatable going forward.