Expect qoq drop in core EPS for 2QFY24F
- We expect SIA’s Jul-Sep 2023 (2QFY24F) quarterly EBIT to decline 16% qoq as jet fuel prices rose 20% qoq, while pax/cargo yields may have fallen qoq.
- We reiterate Reduce with a lower TP of S$5.66, now based on target P/BV of 0.91x (average since 2011) and rolling forward to end-CY24F.
- We previously used a target P/BV of 1.12x (1.5 s.d. above mean) but cut the multiple as higher oil prices now threaten our FY24-26F core EPS estimates.
SIA’s earnings likely peaked in 1QFY24; 2Q may see drop qoq
SIA will release its 1HFY24F results on 7 Nov 2023, to be followed by a briefing the next day. For 1HFY24F, we expect SIA to announce core EBIT of S$1,355m-1,405m, below 2HFY23’s S$1,458m, but above 1HFY23’s S$1,234m, and our estimate of 1HFY24F PATAMI of S$1,134m-1,184m is below 2HFY23’s S$2,157m, but above 1HFY23’s S$927m. SIA already announced a core EBIT of S$755m for 1QFY24, and we expect SIA to deliver a reduced core EBIT of S$600m-650m for 2QFY24F, which is also likely below 2QFY23’s S$678m. As for PATAMI, SIA delivered S$734m in 1QFY24, and we expect a reduced performance of S$400m-450m in 2QFY24, i.e. also below 2QFY23’s S$557m.
Higher oil prices put our FY24-26F core EPS forecasts at risk
The key takeaway from the above numbers is that SIA’s PATAMI likely peaked in the AprJun 2023 quarter (1QFY24), and will most likely trend lower in 2QFY24F on the back of 1) sequentially-higher oil prices (spot jet fuel prices rose 20% qoq to average US$110/bbl in 2QFY24F), 2) lower pax yields (we estimate a 1.5% qoq contraction), 3) lower cargo yields (we estimate 4.5% qoq decline), partially offset by 5.5% qoq growth in revenue passenger kilometres (RPK) demand for SIA and Scoot combined (as both airlines increased their flight capacities and passenger load factors were sustained at high levels), and 8.9% qoq rise in revenue freight tonne kilometres (RFTK) cargo demand due to a technical rebound from very low levels of air freight demand in the first six months of 2023. SIA hedged about 39% of its fuel requirements for the 9-month period from Jul 2023 to Mar 2024 (see Fig 2), and this would have helped mitigate the rise in jet fuel prices. However, the rally in oil prices arising from the Saudi Arabia and Russia export cuts in 2HCY23F, and a further rally on the back of Middle East geopolitical risk after the outbreak of the Hamas-Israel war, could nevertheless raise SIA’s operating costs in the months ahead. Last week, the US Energy Information Administration (EIA) raised its 2024F Brent price forecast from US$88/bbl to US$95/bbl. Even as oil prices increase, we expect SIA’s pax and cargo yields to gradually
decline, as other airlines continue to reactivate aircraft and increase competition to SIA. The key derating catalyst is the increasing likelihood of cuts in our forecasts; if jet fuel prices remain at the current level of US$115/bbl until end-Mar 2024F, average spot jet fuel prices may reach US$108/bbl for FY24F, vs. our current estimate of US$95/bbl. Every US$1/bbl increase in our assumption will hit FY24F core net profit by 1.8%, all else being equal. Upside risk: potential for SIA to outperform our assumptions for yield, PLF and other revenue metrics as demand will likely remain strong until the Lunar New Year.