Dec 23 Operation Data: Pax Data In Line But Cargo Data A Slight Miss
SIA’s Dec 23 pax data was in line with our expectations, with pax capacity/load respectively standing at 92.6%/98.0% of pre-pandemic levels. Cargo load data, a slight drop yoy, missed our expectations of a mild yoy growth, due to a decline in average cargo travel distance. We forecast SIA’s 3QFY24 earnings at S$670m-810m with a good chance to beat the previous quarterly record of S$734m seen in 1QFY24. Maintain HOLD on SIA (for its strong FY24 dividend) and target price of S$6.80.
WHAT’S NEW
• Singapore Airlines (SIA) released its Dec 23 operation data on 15 Jan 24.
• 3QFY24 results preview.
ESSENTIALS
• Key highlights for Dec 23 operation data:
- Pax data: In line, pax load at 98% of pre-pandemic levels. Dec 23 pax load rose 9.8% mom, driven by holiday season travels and coming in at 98% of the pre-pandemic levels. Dec 23 pax capacity rose to 92.6% of pre-pandemic levels, slightly above SIA’s previous guidance of a 92% recovery by Dec 23. Pax load factor improved 1.6ppt mom to 89.4% in Dec 23, still stronger than Dec 19’s 87.6% (pre-pandemic).
- Cargo data: Slightly missed our projection with cargo load dipping 0.9% yoy. SIA’s cargo load (measured by freight tonne-km) dropped 0.9% yoy (-6.5% mom) while we were expecting a mild growth. The slight miss seemed attributable to the average shorter distance travelled by cargo shipments in Dec 23 than a year ago, since actual freight carried rose 4.3% yoy in weight. Cargo capacity recovered to 91.4% of the pre-pandemic levels in Dec 23, driven by the recovery of bellyhold capacity. Cargo load factor dipped 5.3ppt to 52.6% in Dec 23, 6.5ppt below Dec 19’s 59.1% (pre-pandemic).
- Network recovery: Resumed services to Xiamen. During the month, SIA resumed services
to Xiamen, China. SIA’s passenger network now covers 121 destinations (+1 mom),
compared with 137 destinations before the pandemic. - Global air freight rates rebounded in 4Q23 (SIA’s 3QFY24). According to Drewry, global average air freight rates rebounded in the past three months from US$3.58/kg in Sep 23 to US$5.28/kg, representing a 47% increase. 4Q23 averaged at US$4.47/kg, a 25% increase over 3Q23’s US$3.58/kg. According to Baltic Exchange Air Freight Index, air freight rates from Hong Kong to Europe and from Hong Kong to North America rebounded 44% and 45% between Sep 23 and Dec 23. The rebound in air freight rates were believed to be driven by growing cross-border e-commerce demand amid a seasonally strong 4Q. We are lacking reliable data tracking air freight rates in Singapore, but given Singapore’s transhipment hub status for air cargo, we remain hopeful that SIA may also see some moderate strength in cargo yields in 3QFY24.
- Jet fuel price has come off from the peak. According to S&P Global, the global jet fuel price index was in a largely declining trend throughout 4Q23 (SIA’s 3QFY24). The latest reading of 298 as of 12 Jan 24 represents a 19.5% decline from the peak of 370 seen in mid-Sep 23. The index averaged at 316 in 4Q23, largely comparable to 3Q23’s average of 324.
- Forecasting SIA’s 3QFY24 net profit at S$670m-810m. Given the updated Oct-Dec 23 operating data of SIA and factoring in a potential stronger-than-expected qoq rebound in SIA’s 3QFY24 air cargo yields, we update our 3QFY24 net profit guidance for SIA to S$670m- 810m, an increase from our previous guided range of S$650m-770m. Note that the mid-point of our updated guidance range (S$740m) is already higher than SIA’s quarterly historical high of S$734m in 1QFY24. Key factors causing variance to our forecast include: a) SIA’s cost management efficiency, b) our lack of sufficiently accurate data to track SIA’s pax yield, and c) SIA’s high operating leverage (a small swing of the preceding two factors would cause a relatively large swing in SIA’s earnings figures.
- The Red Sea crisis may help air cargo in the seasonally weak 1Q24 (SIA’s 4QFY23). A possible diversion of more time-sensitive cargo from ocean freight to air freight due to the ongoing crisis at the Red Sea may help support airlines’ cargo load in the seasonally weak 1Q24. However, given the still fluid situation, we have yet to incorporate any earnings impact from the possible increment in cargo volume.
EARNINGS REVISION/RISK
• No change. We will do a holistic review of our FY24 earnings forecast after SIA’s 3QFY24 results.
• Key risks: a) Weaker-than-expected macroeconomic environment dampening air travel and air cargo demand, and b) competition catching up faster than expected.
VALUATION/RECOMMENDATION
• Maintain HOLD and target price of S$6.80. Our target price for SIA remains based on 1.26x FY25F P/B, pegged to 1SD above long-term historical mean of 1.08x. The +1SD peg reflects our recognition for SIA’s outstanding operation track record demonstrated during the pandemic crisis and the likely improved long-term outlook given Singapore’s new visa-free arrangement with China.
• Decent yield of 5.8% for FY24 with possible surprise to the upside. We believe that SIA can at least sustain the 38 S cents dividend payout in FY24 (the same level as FY23) and has the flexibility to pay out more. Having said that, the strong dividend in these 1-2 years are unlikely sustainable as we expect SIA’s earnings to normalise/moderate in the next few years, driven by competition.