Fantastic 1Q, but costs may rise in 2Q
- 1QFY3/24 (Apr-Jun 2023) core net profit of S$703m accounted for 41% of our full-year forecast, outperforming due to low jet fuel prices.
- We upgrade our core EPS forecasts in this report by assuming that SIA’s high passenger loads in 1QFY24 will continue for the rest of this year.
- We reiterate Reduce because SIA’s profits will likely peak this year; we raise our TP to S$6.78 (higher CY23F P/BV multiple of 1.12x).
Lower fuel prices lifted the Apr-Jun 2023 EBIT sequentially higher
SIA’s 1QFY24 core net profit of S$703m was a record for the company; 28% higher qoq and more than double yoy. The quarterly EBIT was ‘only’ 7.4% higher qoq, but the superior 28% qoq rise in core net profit may have been due to stronger associate profits, higher net interest income, or lower tax provisions (no details were provided in the brief business update disclosure). 1QFY24 EBIT was S$755m, higher than the immediately-preceding quarter by S$52m; the latter can be attributed mainly to the opex decline of S$86m qoq, which more than offset the S$34m qoq fall in revenue. The qoq opex decline was primarily driven by the fall in jet fuel prices to US$92/bbl in 1QFY24 (13% fall from 4QFY23’s US$106/bbl). Meanwhile, the qoq fall in revenue was caused by yield declines at TR (-14% qoq) and the cargo business (-15% qoq), partially offset by stronger SQ metrics with higher passenger loads (+1.8% pts qoq to 88%) and RPK demand (+5.8%).
Strong topline, but rising fuel prices may take some fizz away
SIA noted in its guidance that passenger demand continues to be very strong over the next three months’ summer travel season, with RPK demand closely matching ASK capacity injections. SIA is also seeing similarly strong demand for the year-end travel season. This suggests that PLF will likely remain high for the rest of FY24F, in our view, and we have reflected this by raising our PLF assumptions for all forecast years. However, we do note that jet fuel prices averaged only US$92/bbl in 1QFY24 and have since risen to US$108/bbl as at 27 Jul. We estimate that every US$1/bbl increase in jet fuel prices will negatively impact our FY24F core net profit by 2%, and in the same way that low jet fuel prices played an important role in SIA’s strong 1QFY24 performance, recovering jet fuel prices in 2QFY24F may deduct from SIA’s profits moving forward. Also, SIA’s legacy fuel hedges all expired at end-Jun 2023, and the remaining hedge positions are at prices closer to prevailing market levels (Fig 13), which suggest fuel hedging gains, if any, may be narrowed in the quarters ahead.
SIA may be exposed to greater competitive risks next financial year
We think SIA is poised to deliver excellent FY24F results; excluding an estimated S$527m share of Air India’s net loss in 4QFY24F, our forecast of SIA’s core net profit in FY24F is S$2.5bn, higher than FY23’s S$1.9bn. We also expect SIA to declare DPS of 38 Scts for FY24F. Upside risks: potential for SIA to outperform our assumptions for yield, PLF and other revenue metrics. But SIA’s expensive valuations also expose investors to de-rating catalysts such as intensifying competition from other airlines, particularly for FY25F.