Time to take profit
SIA’s earnings may peak in FY24F. While we continue to be optimistic about the airline’s near-term earnings outlook, we believe its earnings may peak in FY24F as supernormal passenger yields revert to more normalised levels due to fiercer competition in the region. Additionally, the group will also likely suffer greater losses from associates after Air India becomes an associate. Hence, we recommend that investors take profit and rotate into other Singapore aviation-related names with more durable growth characteristics and attractive valuations in our Singapore Aviation Sector report.
Downgrade SIA to HOLD; unchanged TP of S$6.80. SIA has done exceptionally well in 2023 YTD, outperforming most other airline counters and all other aviation-related names in the Singapore market. Consequently, we are turning neutral on SIA, as its promising earnings outlook is now aptly baked into its valuation, in our view. The airline is currently trading at 5.7x forward EV/EBITDA, which is slightly more than 1 standard deviation (SD) above its five-year pre-pandemic average. Our TP is based on 5.1x EV/EBITDA (blended FY24F/FY25F), which is 0.5SD above its five-year pre-pandemic average, to encapsulate an imminent decline in earnings from FY25F. Hence, we downgrade SIA to HOLD with an unchanged TP of S$6.80.
Switch to STE or SATS. Among the Singapore aviation names, SIA undoubtedly benefitted the most from the mass resumption of air travel, achieving record profits by leveraging its abnormally high pricing power to charge exorbitant air fares to travel-deprived consumers. However, we believe it is time to rotate into other parts of the aviation value chain, as they offer sustained growth (SIA’s earnings will likely peak in FY24F) and a more favourable risk-to-reward profile. STE is our top pick at this juncture, given its strong medium-term earnings growth trajectory (15.5% CAGR over FY22-24F) and undemanding valuation. We also favour SATS, as the majority of downside risks are already reflected in its cheap valuation, but a lack of near-term catalysts could delay its re-rating until later.