Upgrade to Add for big returns over half year
- Upgrade SIA from Reduce to Add on likely strong 2HFY24F results, and our final DPS expectation of 40 Scts, implying a final dividend yield of 6.2%.
- Pax demand remains strong, cargo yields rose sharply in Oct-Dec 2023, jet fuel prices have dropped, and a key competitor is struggling with capacity.
- We raise our TP to S$6.91 on higher core EPS estimates, based on a higher CY24F P/BV of 1.2x (+2 s.d. above mean), from 1.15x previously.
Re-rating catalysts from strong pax and cargo demand in 2HFY24F
Singapore Airlines (SIA) is releasing its 3QFY3/24F (Oct-Dec 2023) business update on 20 Feb 2024. We expect SIA to deliver 3QFY24F PATAMI of c.S$800m, followed by PATAMI of c.S$700m in 4QFY24F. Consequently, we forecast 2HFY24F PATAMI of S$1.5bn, slightly better than 1HFY24F’s PATAMI of S$1.44bn and higher than 2HFY23’s S$1.2bn. The strong 3QFY24F performance would likely be driven by the continuing strong passenger airline PLF of 87-88% in Oct-Nov 2023 (we expect PLF to rise to c.90% in Dec 2023F from the year-end holiday travel peak), and which we think will likely keep yields elevated in 3QFY24F. What surprised us positively was SIA’s strong cargo performance in the closing months of 2023, with average monthly FTK in Oct-Nov 2023 higher by 6% against the monthly average in Jul-Sep 2023 and the Oct-Nov 2023 CLF also 3.4% pts higher vs. Jul-Sep 2023. We expect CLF to rise to 59% in the Dec 2023 seasonal peak (+4.7% yoy), due to robust e-commerce trade between China and Europe/the US. The Baltic Exchange Air Freight Index, representing cargo yields, rose an average of 30% in Oct-Dec 2023 (vs. Jul-Sep 2023) due to the higher demand, albeit still lower on a yoy basis. Disruptions in container shipping on the Red Sea/Suez Canal routing since mid-Nov 2023 as a result of Houthi rebel attacks, and the resulting lengthening of shipping times between Asia and Europe, may also work to the benefit of air freight demand, in our view, even if international navies are now providing some cover for ships plying the route.
Lower jet fuel prices; competitors’ capacity struggles; bumper DPS
Lower jet fuel prices could also help SIA’s results, having declined from a recent peak of US$128/bbl in mid-Sep 23 to US$100/bbl currently. We estimate that SIA’s all-in jet fuel price for 3QFY24F may still increase to US$114/bbl (from 2QFY24’s US$98/bbl), assuming a one-month contractual price lag compared to spot prices, but may fall to c.US$100/bbl in 4QFY24F if current jet fuel spot prices remain at US$100/bbl for the rest of this quarter. Meanwhile, competitor Cathay Pacific (293 HK, Not Rated) is said to be struggling to restore its capacities, with the Straits Times and Reuters reporting that Cathay continues to face pilot shortages, forcing it to cancel flights in Dec 2023 and for the Feb 2024 Lunar New Year. We expect a bumper final DPS of 40 Scts in May 2024F, in addition to the 10 Scts interim DPS declared in Nov 2023, taking the FY24F dividend payout to 53% (similar to FY23’s 58%). Our forecast of 40 Scts final DPS implies a 6.2% yield, which is very good for a six-month holding period, in our view. Downside risks include rising competition as other airlines restore their fleet, and an unexpected surge in jet fuel prices.