Somewhat overcast skies into 2HFY24F
1HFY3/24 core net profit was broadly in line at 69% of our full-year forecast, as higher oil prices will likely pressure earnings in 2H.
While SIA delivered strong results in 1HFY24, the underlying airline EBIT exforex gains were weaker qoq in 2QFY24 on higher opex.
Reiterate Reduce with a lower TP of S$5.47, based on target P/BV of 1.15x (+1.5 s.d. above mean since 2011), up from 0.91x (mean) previously.
Decent 2QFY24, albeit weaker than 1QFY24 on higher fuel prices
SIA delivered an estimated 2QFY24 core net profit of S$648m, in line with our S$600m650m preview forecast. The 2QFY24 EBIT of S$799m was 5.9% higher than 1QFY24’s S$755m, but we believe that after stripping out forex gains, the 2Q EBIT may actually be lower than the immediately-preceding 1Q. The individual airlines’ operating metrics appear to suggest as such; for instance, SQ’s core EBIT (excluding ancillary items and forex effects) fell 18% qoq to S$500m in 2QFY24, TR’s core EBIT fell 24% qoq to S$9m, while cargo’s core EBIT fell 97% to S$2m (Figures 26, 32 and 38). All were affected by the rise in jet fuel prices compared with 1QFY24, but the cargo business was also impacted by the 9% qoq drop in RAFTK (due to excess global airfreight capacity), while TR saw its RASK fall 3% qoq (as it expanded into less-lucrative routes). Only SQ managed to eke out a 0.5% qoq rise in its RASK during 2QFY24, but this was a major deceleration compared with the 9% qoq jump during 2QFY23. RPK demand growth also slowed, with SQ at less than 5% qoq growth in 2QFY24 (vs. 16% qoq in 2QFY23), and with TR at 8% qoq growth (vs. 55%). PLFs at both SQ and TR remained very high yoy, but declined between 30-70bp qoq.
Topline may come under competitive pressure, costs may bite
As SIA’s competitors gradually catch up in terms of their capacity restoration, we expect potential PLF and yield pressure for SIA (and the airline industry broadly) in CY24F. SIA had a first-mover advantage throughout CY22 and into CY23F, which successfully captured the explosion of revenge travel, but the dividends to SIA are dwindling as revenge travel abates and cost of living pressures impact discretionary travel demand at the margin. These trends could eventually curb SIA’s yields and its ability to pass on higher fuel costs. Spot jet fuel prices averaged US$92/bbl in Apr-Jun 2023, US$110/bbl in Jul-Sep, and
US$114/bbl since 1 Oct; this may put pressure on SIA’s CASK metrics in 2HFY24F and FY25F, if oil prices stay high. None of the above pressure points will derail SIA’s strong FY24F, in our view, as its 1HFY24F core net profit already exceeded 1HFY23 by 66%; we expect SIA to deliver core net profit of S$1.9bn in FY24F, which is virtually the same as FY23. We also expect an FY24F DPS of 35 Scts (interim of 10 Scts declared), almost the same as FY23’s 38 Scts. However, stock prices look ahead and we see somewhat overcast skies for SIA, beginning from 2HFY24F. Potential de-rating catalysts include cost inflation, slowing demand growth, and rising competition. Upside risks include the potential for SIA to outperform our assumptions for yield, PLF and other revenue metrics as pax demand will likely remain strong until the Lunar New Year.